Capitalization Rate (Cap Rate)
Definition
The capitalization rate (Cap Rate) is the rate of return on a real estate investment based on its expected income.
Example
A property valued at $500,000 generates an NOI of $50,000. The cap rate is $50,000 / $500,000 = 0.10 or 10%.
Exam Tip
Cap Rate is a percentage, so remember to convert decimals to percentages. A higher cap rate suggests a higher risk or a lower property value for the same income.
Related Math Terms
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.
Determining Ownership Days
Determining ownership days involves calculating the number of days each party (buyer and seller) owned the property during the relevant period (usually a year). This calculation is crucial for accurate proration.
Frequently Asked Questions
Test Your Math Knowledge
Practice with exam-style questions to make sure you can apply Capitalization Rate (Cap Rate) and other math concepts.