Capitalization Rate
Definition of "Capitalization rate"
Also known as “cap rate” or “income yield”, Capitalization Rate is a useful way to compute the rate of return on a real estate investment. It is commonly used in the Income approach to determine the Market Value of a property.
Say you want to buy a property just to rent it and make a profit. You will be advised to discover the cap rate of that property in order to calculate what you will approximately earn renting that property to a Tenant.
To discover the capitalization rate of a property, divide the Net Operating Income (NOI) by the amount you’ll pay to acquire that property. In short, the capitalization rate is the value that one property produces divided by the value that property costs.
Here’s an example to better visualize it:
A building is for sale. It cost $100,000 when it was built 20 years ago. And it produces - between residential and commercial rent - $50,000 a year. The capitalization rate is 50,000/100,000, which equals 0.5%.
An important thing to realize regarding the cap rate is that it does not take into consideration the depreciation of a property. That’s why, when valuing a house, it’s crucial for an Appraiser to use all methods of evaluation appropriate to the case.
Real Estate Tips:
Maybe just learning a new term won't be enough to solve your situation. Check out our real estate questions; perhaps someone else has gone through what you're going through!
Or just head to The OFFICIAL Real Estate Agent Directory® and leave it to the pros.
Popular Real Estate Terms
Device that cuts off an electric circuit when the current becomes to strong. ...
Anything that has physical substance and form, such as land and buildings. ...
One who has died with a valid will in effect. ...
Property to be used by a retail business in the sale of merchandise or rendering of services. An example of retail property is a store. ...
The income earned on an investment, typically stated as a percentage of the market price ...
Residing in a structure that the individual owns. ...
Gradual deterioration of land due to nature such as because of floods, hurricanes and storms. Gradual decline in the value of real estate because of poor market and economic conditions. ...
The definition of dereliction is the intentional property abandonment or desertion with no hope of returning or recovery of a property. Dereliction is the act of abandonment, neglect of ...
The rate at which a market can absorb additional units of supply without causing market saturation and severe price distortions. For example, during a recessionary period, many homeowners ...
Have a question or comment?
We're here to help.