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
Percentage to Decimal Conversion
Converting a percentage to a decimal involves dividing the percentage value by 100.
IRV Formula
IRV stands for Income, Rate, and Value. It represents the relationship between Net Operating Income (I), Capitalization Rate (R), and Property Value (V).
Net Operating Income (NOI)
Net Operating Income (NOI) is the revenue a property generates after deducting all operating expenses.
Gross Rent Multiplier (GRM)
The gross rent multiplier (GRM) is a quick method for estimating the value of income-producing property by multiplying the property's gross rent by a factor derived from comparable sales. GRM = Sale Price / Gross Rent.
Capitalization Rate
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.
Net Operating Income (NOI)
Net operating income (NOI) is the annual income generated by an income-producing property after deducting operating expenses, but before deducting mortgage payments, income taxes, and depreciation.
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.