{"id":878,"date":"2018-02-13T06:58:36","date_gmt":"2018-02-13T06:58:36","guid":{"rendered":"http:\/\/www.realestatewords.com\/?page_id=878"},"modified":"2020-05-24T17:39:14","modified_gmt":"2020-05-24T17:39:14","slug":"capitalization-rate","status":"publish","type":"page","link":"https:\/\/www.realestatewords.com\/capitalization-rate\/","title":{"rendered":"Capitalization Rate"},"content":{"rendered":"

Capitalization Rate Definition<\/h2>\n

The capitalization rate is the expected annualized rate of return<\/a> that an income<\/a> producing property<\/a> will generate on a property owner\u2019s investment<\/a>.<\/p>\n

Explanation<\/h2>\n

Capitalization rate (cap rate) is perhaps the most commonly used indicator of the expected return on a property investment. A cap rate for a property is calculated by dividing the annualized net income<\/a> of a property by its price (or property value<\/a>), which is expressed as a percentage. For example, a property listed for $1m that produces $50k in net income annually would have a 5% cap rate. The cap rate expresses the percentage of the property\u2019s value that is returned to the owner<\/a> each year in income.<\/p>\n

Just as riskier stocks will generally have higher dividends relative to blue chip properties, a low-income apartment complex<\/a> is generally going to have a much higher cap rate than a apartment complex in Beverly Hills. Because the cap rate is so ubiquitous to the value of investment property, an investor can readily add value to their property by successfully increasing rents<\/a> even for a few percentage points. Likewise, decreasing the annual costs of insurance, utilities<\/a>, property management<\/a> fees, maintenance costs<\/a> or any other operating costs<\/a> will increase the cap rate and ultimately the market value<\/a> of the property.<\/p>\n

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