ABSTRACT
What Is This Tool? The capitalization rate-also known as “cap rate” or “income yield”—is a method used to determine the rate of return on a real estate investment.
How Is It Computed? The capitalization rate equals net operating income (NOI) divided by the purchase price. Assume NOI is $25,000 and the investment was $200,000. The capitalization rate equals
12.5 percent
If the market rate is 10 percent, the fair market value of similar property is $250,000 ($25,000/10 percent). The property may be underpriced.
