Capitalization Rate

Capitalization Rate

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Please note that the content of this book primarily consists of articles available from Wikipedia or other free sources online. Capitalization rate is the ratio between the net operating income produced by an asset and its capital cost (the original price paid to buy the asset) or alternatively its current market value. The rate is calculated in a simple fashion as follows. For example, if a building is purchased for $1,000,000 sale price and it produces $100,000 in positive net operating income (the amount left over after fixed costs and variable costs are subtracted from gross lease income) during one year, then: The asset's capitalization rate is ten percent. However, the investor must take into account the opportunity cost of keeping his money tied up in this investment. By keeping this building, he is losing the opportunity of investing $1,000,000 (by selling the building at its market value and investing the proceeds). As shown above, if a building worth a million dollars brings in a net of one hundred thousand dollars a year, then the cap rate is ten percent. His real cap rate is ten percent, not fifty percent, and he has a million dollars invested, not two hundred thousand. Ergo, the current value of the investment, not the actual initial investment, should be used in the cap rate calculation.show more

Product details

  • Paperback | 92 pages
  • 152 x 229 x 6mm | 145g
  • Junct
  • United States
  • English
  • 6136556588
  • 9786136556581