capitalization rate

(redirected from Cap Rates)

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 ?
Finally, they divided those figures by the historical costs of buying a vacation rental to determine cap rates for each market.
Cap Rates Remain Steady, Compressing Spreads Across CRE Sectors
Apartment transaction data from Real Capital Analytics shows that increased investment in the suburbs is causing prices for those assets to rise and cap rates to fall.
Despite an investment activity slowdown, commercial real estate cap rates remained stable across most asset types during the first half of 2016, according to CBRE Group, Los Angeles.
"Though it seems counterintuitive, cap rates have historically been fairly resistant to the pressures of rising interest rates."
This article discusses appraisals, cap rates and loan dollars.
* Net lease retail cap rates averaged 6.52% for Florida in 2014, roughly 50 basis points lower than the national average
Every trade publication, published article, market participant and third-party report relating to real estate will quote cap rates for various markets.
Cap rates will continue to jog upwards as long as purchase prices continue to fall and rents remain relatively flat, analysts said.
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.S.