Capitalization Rate (Cap Rate) | Formula | Example
In this video, we will study what is Capitalization Rate? along with its formula, disadvantages and practical example.
𝐖𝐡𝐚𝐭 𝐢𝐬 𝐂𝐚𝐩𝐢𝐭𝐚𝐥𝐢𝐳𝐚𝐭𝐢𝐨𝐧 𝐑𝐚𝐭𝐞?
-----------------------------------------------------
The capitalization rate is ratio of net operating income and asset's market value.
𝐂𝐚𝐩𝐢𝐭𝐚𝐥𝐢𝐳𝐚𝐭𝐢𝐨𝐧 𝐑𝐚𝐭𝐞 𝐅𝐨𝐫𝐦𝐮𝐥𝐚
-------------------------------------------------------------------
Cap Rate Formula = Net Operating Income / Market Value of the Asset
𝐂𝐚𝐩𝐢𝐭𝐚𝐥𝐢𝐳𝐚𝐭𝐢𝐨𝐧 𝐑𝐚𝐭𝐞 𝐄𝐱𝐚𝐦𝐩𝐥𝐞
-------------------------------------------------------
Assume an office building gives $15,000,000 as a net operating income and market value $ 95,000,000.
By using below formula we get,
Cap Rate Formula = Net Operating Income / Market Value of the Asset
= 15000000/95000000 = 15.79%
This means the building is sold for $95 Mn, it can also be said that the building was sold at 15.79% cap rate.
𝐂𝐚𝐩𝐢𝐭𝐚𝐥𝐢𝐳𝐚𝐭𝐢𝐨𝐧 𝐑𝐚𝐭𝐞 𝐃𝐢𝐬𝐚𝐝𝐯𝐚𝐧𝐭𝐚𝐠𝐞𝐬
--------------------------------------------------------------
#1 - Capitalization Rate can only be used if the net operating income is constant or fluctuates little.
#2 - Capitalization rate may take different factors into consideration, but it does not reflect future risk.
If you want to know more about 𝐂𝐚𝐩𝐢𝐭𝐚𝐥𝐢𝐳𝐚𝐭𝐢𝐨𝐧 𝐑𝐚𝐭𝐞, you can visit the 𝐥𝐢𝐧𝐤 𝐩𝐫𝐨𝐯𝐢𝐝𝐞𝐝 𝐡𝐞𝐫𝐞:-https://www.wallstreetmojo.com/capita...
Subscribe to our channel to get new updated videos. Click the button above to subscribe or click on the link below to subscribe - / @wallstreetmojo