Capitalization Rate

[kap-i-tl-uh-zey-shuhn reyt]

The capitalization rate (also known as cap rate) is used in the world of commercial real estate to indicate the rate of return that is expected to be generated on a real estate investment property. This measure is computed based on the net income that the property is expected to generate and is calculated by dividing net operating income by property asset value and is expressed as a percentage. It is used to estimate the investor's potential return on their investment in the real estate market. The figure also helps to determine the exit rate or terminal capitalization rate for a property when it is sold at the end of the projected holding period.