Capitalization Rate

The capitalization rate (also termed as cap rate) is the amount of return obtained from a property based on its annual income

The capitalization rate is evaluated by dividing an asset’s net operating income (NOI) by its total market value.

This ratio stated as a percentage estimates an investor’s potential returns on a real estate investment.

Cap rate is mostly used to evaluate the relative value of comparable real estate investments.

 

CAP rate formula is as follows: –

Capitalization Rate-  Net Operating Income / Current Market      Value

where,

 

The net operating income is the (predictable) annual income received by the property (like rentals) and is derived by deducting all the expenses incurred for operating or maintaining the property. 

The current market value of the asset is the current value of the property as per the principal market rates.

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