What is Capitalization Rate?

Capitalization Rate refers to the rate which helps in measuring the rate of return on real estate investment as per the income which the property is expected to make in future.

It is computed by division of Net Operating Income of an investment by its present Market Value. Net Operating Income is basically the annual return on the property after all the operating costs are subtracted from it. Operating costs are generally property tax,  maintenance costs etc. Latter does not include the depreciation. It is often expressed as a percentage and is known as the “cap rate”.

It is a useful measure to determine the usefulness of the investment although it is not an exhaustive measure.