Real Estate Investment Software

The capitalization rate, a.k.a the–cap rate–is a way of measuring the ratio between cash flows an real estate investment property and the purchase price, or alternatively its current fair market value. Here is the formula for the cap rate:

* annual cash flow / cost (or value) = Capitalization Rate

For example, if a building is purchased for $500,000 and it produces $50,000 in positive net cash flow (costs are subtracted from gross income) during a year, then:

* $50,000 / $500,000 = 0.10 = 10%

The capitalization rate is ten percent.

The capitalization rate is measuring how fast an investment will pay back the original purchase price. from net cash flows. In the example above, the purchased building will be fully capitalized (pay for itself) after five years (100% divided by 10%). If the capitalization rate were 5%, the payback period would be twenty years.