Wednesday, May 26, 2010

How To Calculate Capitalization Rate for Real Estate

Those who invest in real estate via income-producing properties need to have a method to determine the value of a property they're considering buying. By using other properties' operating income and recent sold prices, the capitalization rate is determined and then applied to the property in question to determine current value based on income.

Get the recent sold price of an income property, such as an apartment complex.
Example: Six unit apartment project sold for $300,000

For that same apartment project, determine the net operating income, or the net rentals realized by the owners.
Example: The rental income after expenses (net) is $24,000

Divide the net operating income by the sale price to get cap rate.
Example: $24,000 / $300,000 = .08 or 8% (The Capitalization Rate)