Capitalization Rate

Filed Under » , , ,
Dictionary Says

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 Says

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.

Articles Of Interest

  1.

    Can Real Estate Stabilize Your Portfolio?

    History suggests that real estate can provide diversification and a hedge against inflation.

  2. How Interest Rates Affect Property Values

    When interest rates fall, real estate prices tend to increase. Why? Find out here.

  3. 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.

  4. Taking Stock Of Discounted Cash Flow

    Learn how and why investors are using cash flow-based analysis to make judgments about company performance.

  5. Weighted Average Cost Of Capital (WACC)

    Weighted average cost of capital may be hard to calculate, but it's a solid way to measure investment quality

  6. Exploring The Current Account In The Balance Of Payments

    Learn how a country's current account balance reflects the country's economic health.

  7. Break Into Forex In 12 Steps

    Learn how to get started in forex trading.

  8. Taking Shots At CAPM

    Find out why many investors think the capital asset pricing model is full of holes.

  9. George Soros: The Philosophy Of An Elite Investor

    George Soros spent decades as one of the world's elite investors, and even he didn't always come out on top. But when he did, it was spectacular.

  10. Is Real Estate Ever A Wise Investment For Retirees?

    Being a landlord sounds like the path to riches: you buy some property, rent it out and watch the checks come in every month. The reality is that it’s a young man’s game. There’s just too much ...
comments powered by Disqus
Marketplace
Hot Definitions

  1. Yield Elbow

    The point on the yield curve indicating the year in which the economy's highest interest rates occur. The yield elbow is the peak of the yield curve, signifying where the highest interest rates occurred.

  2. Xenocurrency

    A currency that trades in markets outside of its domestic borders.

  3. Wanton Disregard

    A standard of severe negligence. Wanton disregard is a very serious accusation that indicates that a person behaved extremely recklessly.

  4. Ultra ETF

    A class of exchange-traded funds (ETF) that employs leverage in an effort to achieve double the return of a set benchmark.

  5. Toehold Purchase

    A purchase of less than 5% of a target company's outstanding stockmade by an acquiring company. A toehold purchase of just under 5%, while not a significant stake in a firm, allows the shareholders a "toe-holds" grip on the company and its decision making.

  6. Samurai Bond

    A yen-denominated bond issued in Tokyo by a non-Japanese company and subject to Japanese regulations.
Trading Center
http://sp.fastclick.net/ad/tr/10858-64082-15546-0?mpt=1c05faea0034e726fe26ff609e26466a