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How To Calculate Capitalization Rate for Real Estate

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Those who invest in real estate via income-producing properties need to have a method to determine the value of a property they're considering buying. By using other properties' operating income and recent sold prices, the capitalization rate is determined and then applied to the property in question to determine current value based on income.
Difficulty: Easy
Time Required: 5 minutes

Here's How:

  1. Get the recent sold price of an income property, such as an apartment complex.

    Example: Six unit apartment project sold for $300,000

  2. For that same apartment project, determine the net operating income, or the net rentals realized by the owners.

    Example: The rental income after expenses (net) is $24,000

  3. Divide the net operating income by the sale price to get cap rate.

    Example: $24,000 / $300,000 = .08 or 8% (The Capitalization Rate)

Tips:

  1. Others who read this article also found this article on compound interest to be valuable.
  2. We now have a forum for real estate investors to discuss strategies, share knowledge and have fun talking real estate investment. Join the forum now.

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