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Calculation of Capitalization Rate

  Determine the Capitalization Rate The  capitalization rate  is used to imply the rate of return(ROI) that is expected on an investment property. There are three methods we can use: The  comparison method  is the most common and evaluates comparable sales in the market for the same time period to estimate the market's rate. The  band of investment method  sums the costs of capital and desired returns to estimate the capitalization rate. Assume Mr.A  can get a mortgage for 80% of the property, leaving her to pay the remaining 20% in cash. The interest rate on the mortgage is 4%, and Mr.A wants to earn a 10% return on her cash investment. The band of investment method for capitalization rate = (80% of 4%) + (20% of 10%) = {(80 x 0.04) + (10 x .20)}% = 5.2% The  summation method  uses the sum of the safe rate, risk rate, non-liquidity rate, and management rate to determine the capitalization rate. Safe rate is the rate of a risk-free inves...
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CAPITALIZATION VALUE

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  What Is the Income Capitalization Approach to Property [ When it comes to determining the  value of real estate , there's no perfect method. But from an investor point of view, the income a property produces is a great starting point for determining how much a property is worth. The income capitalization approach is a method of real estate valuation that uses a property's annual income to determine its  fair market value . In this article, we'll take a closer look at how the income capitalization approach works, how to use it, and some drawbacks to the approach investors should know about, as well as some alternative (or complementary) valuation approaches  real estate investors  may want to consider. What is the income capitalization approach? The income capitalization approach to property valuation, also commonly referred to as the income approach, is a method by which real estate investors attempt to determine the fair market value of real estate ...
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