Capitalization Rate

From Investment Wiki

Capitalization Rate:

The comparative rate used to determine the capital value of an income stream. In real estate, the Capitalization Rate is used to determine the value of a property based on the Net Operating Income. Formula (Net Operating Income / Original Property Value) * 100.

In order to make a quick valuation of a property, you can divide the Net Operating Income by the Capitalization Rate. The Net Operating Income for this property is $12,000 per year. Assuming the Capitalization Rate is 6%, the value of the property would be estimated at $200,000.