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====== Capitalization ======

**Capitalization** is the process of **converting income into an estimate of value** for income-producing real property.

===== Key Characteristics =====
  * Used in the **income approach** to value
  * Relies on a **rate of return**
  * Based on **net operating income (NOI)**
  * Reflects **risk, return, and market conditions**

===== Direct Capitalization =====
  * Most common exam method
  * Converts **one year’s NOI** into value

===== Core Formula =====
  * **Value = NOI ÷ Capitalization Rate**
  * **Cap Rate = NOI ÷ Value**

===== What Is Capitalized =====
  * **Net Operating Income (NOI)**
    * Gross income − operating expenses
    * Excludes mortgage payments, depreciation, income taxes

===== Capitalization vs Gross Multiplier =====
  * **Capitalization**
    * Uses **net income**
    * More precise

  * **Gross Multiplier**
    * Uses **gross income**
    * Simpler, less precise

===== Exam Tip =====
  * Capitalization applies only to **income-producing property**
  * Higher cap rate = **lower value**
  * Lower cap rate = **higher value**