Terms

Capitalization Rate

Capitalization Rate

Nick Name
Cap Rate
Parent term

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 InvestmentĀ 
  • 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 RatesĀ  tends to mean Asset Values are Rising