capitalization rate

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Capitalization rate

The interest rate used to calculate the present value of a number of future payments.

Capitalization Rate

The net income an asset produces in a given year divided by its purchase price. The capitalization rate is used to help determine the rate of return, or how fast an asset pays for itself and begins to make a profit. For example, if an asset cost $1,000,000 and it produces $100,000 in a given year, the capitalization rate is 10% and it will take 10 years to pay for the asset with the money it produces. However, it is important to note that the capitalization rate may change from year to year. For example, the same asset could produce $100,000 in year one but $250,000 in year two. It is informally known as the cap rate.

capitalization rate

The rate used to convert an income stream into a present value lump sum. For example, a capitalization rate of 10% and an income stream of $2,000 annually provide a present value of $2,000/0.1 , or $20,000. The capitalization rate for a particular flow of income is a function of the rate of interest on Treasury bills (the risk-free rate) and the risk associated with the flow of income. A riskier investment has a higher capitalization rate and, therefore, a lower present value.

capitalization rate

the rate at which the STOCK MARKET capitalizes the current earnings of a company. It is calculated by dividing a company's earnings per ordinary share by the current market price per ordinary share in order to arrive at the EARNINGS YIELD.

capitalization rate

Usually called a cap rate,it is a number used in order to estimate the value of an income-producing property.There are no cap rate tables,no firm standards,and no universal formulas for arriving at one.Cap rates change frequently,depending on market demand for particular types of properties, lender appetite for particular types of loans, and prevailing interest rates. Most commercial real estate brokers,appraisers,and lenders know a range of cap rates for different types of properties.One divides the annual net operating income by the cap rate to arrive at a value.Highquality multi-tenant medical offices might sell for cap rates of 7 percent, and rundown apartment buildings with high turnover might sell for a cap rate of 13 percent.If both of them had gross rents of $300,000 per year with operating expenses of $60,000, then each would have a net operating income (NOI) of $240,000. By dividing the cap rate into the NOI, the medical offices would have a value of $240,000 0.07, or $3,428,571.Using the same formula for the apartments,but the higher cap rate, $240,000 0.13 gives a value of $1,846,153. It seems counterintuitive at first, but the higher the cap rate,the lower the value.

References in periodicals archive ?
Common reasons for variations in cap rates are attributed to the income stream and operating expenses used in the extraction of the rate.
Cap rates should remain relatively low for the remainder of 2013, despite rising interest rates seen over the past two months, according to Brookfield Financial.
Stabilizing cap rates, low interest rates and declining home ownership rates are driving an optimistic outlook for the multifamily industry--with demand projected to continue at a similar pace throughout 2012, according to respondents of the RealShare/Jones Lang LaSalle Apartments Outlook 2012 Survey, released in December 2011.
Other South Florida sales are bringing up cap rates significantly from the boom years.
Theoretical Relationship between Discount Rates and Cap Rates
While average hotel cap rates have remained relatively stable over the past two years, they have dropped dramatically since 2002, according to the HVS 2007 U.
The "bears" claim that the reduction is solely cyclical and that the historic 200 basis points for independent living properties is warranted because of the increased risk of these property types over the equivalent multifamily class, and that the reduction in cap rates simply is tracking the downward reduction in apartment cap rates.
This unusual positive spread has created an arbitrage opportunity in anticipation of a downward adjustment in cap rates (i.
We also cover historic trends for pricing and cap rates for drug stores, fast food properties and big box projects of all sizes, ranging from junior boxes as small as 20,000 square feet in size to mega-boxes of 80,000 square feet or more.
paragraph] The market has carried that momentum into 2015, and what lies ahead will depend largely on interest rates and how investors' expectations about interest rates affect cap rates and cap-rate spreads.
para]]Deal Volume Hit a New All-Time Peak in Q1 as Cap Rates Compressed Toward Multi-Decade Lows[[/para]]