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Capitalization Rate
The interest rate that is thought to be an acceptable return
on an investment.
Capitalizatio Rate represents the annual return on an investment before mortgage payments and income taxes. To find a Cap Rate use the following formula: Cap Rate = Net Operating Income / Market Value x 100.
Example:
If a building is purchased for $1,000,000 sale price and it produces $100,000 in positive net cash flow (the amount left over after fixed costs and variable costs are subtracted from gross lease income) during one year, then:
- $100,000 / $1,000,000 = 0.10 = 10%
The asset's capitalization rate is ten percent.
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