- 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".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.

*Investment dictionary.
Academic.
2012.*

### Look at other dictionaries:

**Capitalization rate**— (or cap rate ) is a measure of the ratio between the net operating income produced by an asset (usually real estate) and its capital cost (the original price paid to buy the asset) or alternatively its current market value. The rate is calculated … Wikipedia**capitalization rate**— The interest rate used to calculate the present value of a number of future payments. Bloomberg Financial Dictionary * * * capitalization rate capitalization rate ➔ rate1 * * * capitalization rate UK US (UK also capitalisation rate) noun [C]… … Financial and business terms**capitalization rate**— n. Cap Rate, interest rate for calculating the present value; method for converting an estimate of income expectancy of one a single year into an indication of value in one direct step by dividing the income estimate by a proper rate … English contemporary dictionary**capitalization rate**— Fin the rate at which a company’s reserves are converted into capital by way of a stock split … The ultimate business dictionary**earnings capitalization rate**— UK US noun [C] STOCK MARKET ► EARNINGS CAPITALIZATION RATIO(Cf. ↑earnings capitalization ratio) … Financial and business terms**Terminal Capitalization Rate**— A rate used to estimate the resale value of a property at the end of the holding period. The expected net operating income (NOI) per year is divided by the terminal cap rate (expressed as a percentage) to get the terminal value. Terminal… … Investment dictionary**Market capitalization rate**— Expected return on a security. The market consensus estimate of the appropriate discount rate for a firm s cash flows. The New York Times Financial Glossary … Financial and business terms**market capitalization rate**— expected return on a security. The market consensus estimate of the appropriate discount rate for a firm s cash flow. Bloomberg Financial Dictionary … Financial and business terms**overall capitalization rate**— Fin net operating income other than debt service divided by value … The ultimate business dictionary**Capitalization Of Earnings**— A method of determining the value of an organization by calculating the net present value (NPV) of expected future profits or cash flows. The capitalization of earnings estimate is done by taking the entity s future earnings and… … Investment dictionary