capitalization_rate
Table of Contents
Capitalization Rate (Cap Rate)
The capitalization rate (cap rate) is the rate of return used to estimate the value of income-producing real property based on its income.
Key Characteristics
- Used in the income approach to value
- Expressed as a percentage
- Reflects risk, return, and market conditions
- Higher cap rate = higher risk / lower value
- Lower cap rate = lower risk / higher value
Formula
- Cap Rate = Net Operating Income (NOI) ÷ Property Value
- Value = NOI ÷ Cap Rate
Net Operating Income (NOI)
- Gross income minus operating expenses
- Excludes mortgage payments, depreciation, and income taxes
Example
- NOI: $50,000
- Cap rate: 5%
- Value = $50,000 ÷ 0.05 = $1,000,000
Exam Tip
- Cap rate is a rate of return, not an interest rate
- Used only for income-producing property
capitalization_rate.txt · Last modified: by reidjs