Commercial Real Estate Dictionary

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Capitalization rate (cap rate)

Definitions of Capitalization rate (cap rate)
  • The Capitalization Rate (Cap Rate) is the percentage rate used to estimate value in the capitalization approach. Value = NOI/Cap Rate
    Greater demand in this market for apartment buildings has forced capitalization rates down, meaning higher prices for these investment properties.

What Is A Cap Rate?

The capitalization rate is a percentage rate used to convert net operating income (NOI) into a market value under the capitalization approach.

The capitalization approach is a method that converts an asset's net operating income into a market value by dividing net operating income by a percentage rate. That percentage rate is called the capitalization rate, or "cap rate" for short.

The cap rate is an important concept in investment real estate. It is a very practical approach to estimating a property's value because we can establish the property's net income. We can also establish a cap rate by researching sales of comparable investment properties and determining the cap rate those properties sold for.

Once we have established an investment property's net operating income and determined a market determined cap rate, we can divide the NOI by the cap rate to indicate a market value of the property.

Market Value =
Cap Rate

The resulting indication of market value represents the monetary value of capital necessary to generate a specific net operating income under the current market conditions.


Real Estate Terms

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2. Who can you go to to finance your construction or development project? Construction Lender >>

3. What professional can assist you in maximizing the value of your investment property? Asset Manager >>

4. How can we assess future commitment to infrastructure to support our communities and future development? Capital Improvements Projects >>

5. What measurement indicates if a property's financial performance can cover its debt? DSCR >>

6. What part of a city is the center of urban economic development? CBD >>

7. What allows property owners and professionals to estimate the market value of a commercial property? Comparable Property >>

8. What can landords do to entice prospective tenants? Concession >>

9. What critical factor do stores depend on to drive traffic? Anchor Tenant >>

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