Capitalization Rate
Capitalization Rates are a ways to measure real estate values.
- Used to value real estate assets
- Formed by taking the yearly net operating income (rent less all expenses), dividing by purchase cost and multiplying by 100
- (Net Operating Income / Purchsae Price) * 1000
- Example:
- $100,000 purchase price
- $10,000 net operating income
- Cap Rate = (10,000 / 100,000) * 100 = 10
- 10 Cap = 10% Return on Investment
- Reduced Income = Lower Cap Rate
- $200,000 purchase price
- $10,000 net operating income
- Cap Rate = (10,000 / 200,000) * 100 = 5
- 5 Cap = 5% Return on Investment
- Falling Cap Rates tends to mean Asset Values are Rising