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Capitalization Rate

Capitalization Rate

This term refers to the formula used to approximate the profit a real estate investor can hope to gain from an investment.

The formula:

CAP Rate = (NOI) / Cost of the property

The Net Operating Income (NOI), income after all expenses are paid the property will generate, divided by the cost of the property, or by the current total value of the property. Calculating the capitalization rate is a good way to see money working for the real estate investor and begin the process of evaluating investment opportunities and how fast the investment will pay itself, but there are a myriad of other factors to consider.