Capitalization Rate
Definition of 'Capitalization Rate'A rate of return on a real estate investment property based on the expected income that the property will generate. Capitalization rate is used to estimate the investor's potential return on his or her investment. This is done by dividing the income the property will generate (after fixed costs and variable costs) by the total value of the property. If you want to get technical, it is basically the discount rate of a perpetuity.Capitalization Rate = Yearly Income/Total Value Also known as "cap rate". |
|
Investopedia explains 'Capitalization Rate'Capitalization rate is a good jumping-off point to quickly compare many investment opportunities, but it should not be the sole factor in any real estate investment decision. Many more factors need to be looked at such as the growth or decline of the potential income, the increase in value of the property, and any alternative investments available.For example, if Stephane buys a property that will generate $125,000 per year and he pays $900,000 for it, the cap rate is: 125,000/900,000 = 13.89%. But it gets a little more complicated. What if the property's value rises to $2 million two years later? Now the cap rate is a less favorable 125,000/2 million = 6.25%. This is because Stephane could potentially sell the property for $2 million and use that money for an alternative investment. |
Related Definitions
Articles Of Interest
-
Can Real Estate Stabilize Your Portfolio?
History suggests that real estate can provide diversification and a hedge against inflation. -
How Interest Rates Affect Property Values
When interest rates fall, real estate prices tend to increase. Why? Find out here. -
Simple Ways To Invest In Real Estate
Owning property isn't always easy, but there are plenty of perks. Find out how to buy in. -
Taking Stock Of Discounted Cash Flow
Learn how and why investors are using cash flow-based analysis to make judgments about company performance. -
Why Your Pension Plan Has Sovereign Debt In It
One type of security pensions tend to invest in is sovereign debt, or debt issued by a government. -
Investing In REITs Instead Of Property
Learn why this one particular REIT is a better investment than holding physical property in your retirement portfolio. -
Should You Add A Securities License To Your Qualifications?
Clients love planners who sell securities, but a securities license takes a lot of work. Learn if the stress and study are worth it. -
There Are New REITs On The Horizon
For investors, the surge in new REIT activity is providing some pretty interesting dividend opportunities. -
The Best Way To Buy Silver
Discover whether ETFs or physical bullion is the best way for investors to get exposure to silver. -
6 Popular ETF Types For Your Portfolio
Exchange traded funds are an extremely popular diversification tool that can protect your portfolio during troubled periods.
Free Annual Reports