Capitalization Rate
The interest rate that is thought to be an acceptable return
on an investment.
Capitalization Rate represents the annual return on
an
investment before mortgage
payments and income taxes. To find a Cap Rate use the following formula: Cap
Rate = Net Operating Income / Market Value x 100.
Example:
If a building is purchased for $1,000,000 sale price and it produces
$100,000 in positive net cash flow (the amount left over after fixed costs
and variable costs are subtracted from gross lease income) during one year,
then:
- $100,000 / $1,000,000 = 0.10 = 10%
The asset's capitalization rate is ten percent.
