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
Littoral refers to a piece of land bordering a large body of water that is not moving, such as an ocean, pond, sea, or lake. Many find "littoral" obscure since it's not widespread in ...
Creates a lien against the mortgagor's property, but does not permit a lien against his or her personal assets. See also non recourse. ...
Cash flow before subtracting income taxes. ...
The definition of cost of living is the amount of money you need to have in order to sustain a certain lifestyle. The cost of living refers to the amount of money you spend on housing, ...
Principle stating that the joint tenants must have equal rights to possession of the whole property. ...
Compensation representing the fair market value of a property taken in an eminent domain action. Foe example, Brian received $150,000 for his home which was condemned in an eminent domain ...
Room containing a toilet and wash basin, but does not include a shower or bath tub. ...
The ratio between a structure's total floor area and the total land area of the land upon which it is constructed. The floor area ratio definition is the ratio of the total amount of usable ...
One who represents a zone such an elected leader of a region. He or she have dealings with the county's officials in matters affecting that zone. ...
Have a question or comment?
We're here to help.