Capitalization Rate


DEFINITION of 'Capitalization Rate'


Capitalization Rate = Yearly Income/Total Value

Also known as "cap rate".


Capitalization rate is a good jumping-off point to quickly compare many investment opportunities, but it should not be the sole factor in any real estate investment decision. Many more factors need to be looked at such as the growth or decline of the potential income, the increase in value of the property, and any alternative investments available.

For example, if Stephane buys a property that will generate $125,000 per year and he pays $900,000 for it, the cap rate is: 125,000/900,000 = 13.89%.

But it gets a little more complicated. What if the property's value rises to $2 million two years later? Now the cap rate is a less favorable 125,000/2 million = 6.25%. This is because Stephane could potentially sell the property for $2 million and use that money for an alternative investment.

  1. Capitalization

  2. Dividend Discount Model - DDM

  3. Interest Rate

  4. Overcapitalization

  5. Perpetuity

  6. Present Value - PV

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