Capitalization Rate
Definition
The capitalization rate (cap rate) is the ratio of a property's net operating income to its sale price, expressed as a percentage. It is used to estimate value and compare profitability of investment properties. Cap Rate = NOI / Value.
Example
An office building generates $80,000 in annual NOI and sold for $1,000,000. Cap rate = $80,000 / $1,000,000 = 8%. If a similar building generates $95,000 in NOI and the market cap rate is 8%, the value = $95,000 / 0.08 = $1,187,500.
Exam Tip
Memorize the IRV formula: I (Income/NOI) = R (Rate/Cap Rate) x V (Value). You can solve for any variable. Remember the inverse relationship: as the cap rate goes down, value goes up. Do not confuse cap rate with interest rate or return on equity.
Related Math Terms
Capitalization Rate (Cap Rate)
The capitalization rate (Cap Rate) is the rate of return on a real estate investment based on its expected income.
Property Value (based on Cap Rate)
In real estate, property value can be estimated by dividing the Net Operating Income (NOI) by the Capitalization Rate (Cap Rate).
Percentage to Decimal Conversion
Converting a percentage to a decimal involves dividing the percentage value by 100.
Monthly Interest Calculation
Monthly interest is the portion of the total annual interest that is paid or accrued each month.
Annual Interest Calculation
Annual interest is the total amount of interest charged on a loan or investment over a year.
Calculating Daily Rate
Daily rate calculation involves determining the cost or income per day by dividing the total amount by the number of days in the period (usually a year or a month). This is a fundamental step in proration.
Frequently Asked Questions
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