What is a capitalization rate?

What is a capitalization rate?


The capitalization rate is the ratio between your net income produced by the property and it's costs. In other words:

                               net operating income
Capitalization rate =  ---------------------------
                              cost to acquire property

So for example, if a property costs you $500,000 and you can generate $50,000 in yearly revenue, than your capitalization rate for that year is 10% ($50,000/$500,000).

The capitalization rate is often used as a metric when determining the value of a property as an investment property. The higher the capitalization rate, the more valuable the property should theoretically be (because it should hence be more profitable).

Views: 1738        Posted on: Apr 10 2012        Tags: Definitions