Capitalization Rate (Cap Rate)
The rate of return on an income property, equal to net operating income divided by value.
Quick flashcard
What does Capitalization Rate (Cap Rate) mean on the Texas real estate exam?
Answer: The rate of return on an income property, equal to net operating income divided by value.
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Capitalization Rate (Cap Rate) definition
The capitalization rate measures the return on an income-producing property. It equals net operating income divided by value. Rearranged, value equals net operating income divided by the cap rate, which is the income approach to value.
Net operating income is income minus operating expenses. Mortgage payments (debt service) are never part of net operating income.
Source basis
Definition checked against the official sources below on .
On the exam
Worked example
Worked example
NOI of 72,000 divided by a 9 percent cap rate equals an 800,000 dollar value.
Exam trap
Tested in
Value & Appraisal (11 of 80 National)
From definition to recall
See this term inside a real exam question.
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