# cap rate

## 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.

## cap rate

The Complete Real Estate Encyclopedia by Denise L. Evans, JD & O. William Evans, JD. Copyright © 2007 by The McGraw-Hill Companies, Inc.
References in periodicals archive ?
Meanwhile, investment properties in Suffolk County on the east end of Long Island had an average cap rate of 5.3 percent, with median prices of \$340,000.
A new report from Vacasa, North America's largest vacation rental company, has ranked vacation rental markets based on aggregate cap rate. Capitalization rate (referred to as cap rate by most) is the ratio of a property's net operating income over its cost.
"The tighter cap rate spreads suggest that investors have more confidence in the commercial real estate market," said Muoio.
Cap Rate (OAR), initial rate of return in an all-cash transaction.
"In those markets where change is anticipated, cap rates are more likely to increase rather than decrease--but any changes will be small," CBRE's North America Cap Rate Survey reported.
The company's 21 separate acquisitions aggregated approximately 8.8m square feet, with an average cash cap rate of 7.2%, an average annualized straight-lined cap rate of 7.9%, and an average lease term in excess of 11 years.
A second example would be Direct Capitalization (cap rate).
Mathematically, the "cap rate" equation is simple: Property Value = Annual Net Operating Income / Cap Rate.
* McDonald's state wide average is a 4.24% cap rate
The Class A office building sold at a cap rate, the annual rental income from a building divided by its purchase price, of 9.6 percent.
In appraisal textbooks, the relationship between discount rates and overall capitalization rates, or cap rates, is a simple one: Discount rate = cap rate + income growth rate or

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