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
Imagine someone asking you about the definition of the real estate market. At first sight, it may seem like an easy answer. But wait! Could the real estate market meaning be more complex ...
In general terms, a licensee means a person or legal entity who has received authorization or permission to perform a particular activity through another party (the licensor in our case.) ...
The Federal Reserve Bank's regulation applying to the amount of credit that may be advanced by brokers and dealers to customers to buy securities. ...
Enclosed building that stores agricultural products (hay, livestock or farm equipment). ...
The term mortgage amortization is the steady switch occurring to each mortgage payment between how much interest is covered and how much principal each month. Simply put, mortgage ...
List of business property. ...
Regulation of the Securities and Exchange Commission (SEC) establishing the criteria to avoid a private offering. For example, John wants to sell shares in an apartment house to several ...
Charge levied against property owners to finance an improvement made by the local government which benefits the homeowners and commercial businesses. Examples are sidewalks and sewers. ...
Those factors causing the movement of people, industry, and business from the central city to the outside central city areas, suburbs, and/or small cities. Elements of the dispersing force ...
Have a question or comment?
We're here to help.