It is basically a return on investment (ROI) for a property. The concept of capitalization rate gains its existence from the real estate business. The capitalization rate calculator calculates the yield on the investment in property in a particular period.
It assumes that the property is bought for cash only and no borrowings are made for such purpose and which makes it a bit impractical. And hence, it has an unleveraged effect on its calculation.
There is no ideal capitalization rate for evaluating profitability. However, the higher rate is better as it would help in recovering the cost faster.
The formula for calculating the capitalization rate is:
Capitalization Rate = Net Operating Income/Market Value of Asset
Here, net operating income includes only the income generated from such assets under the investment. It can be calculated by deducting operating expenses from gross income. The capitalization rate is expressed in percentage terms.
Capitalization Rate Calculator
How to Calculate Using Calculator?
The following details will be entered into the capitalization rate calculator for a quick result.
Market Value of Asset – We consider the market value of assets prevailing in the market at the time of calculation instead of book value. However, one may take book value into account. But this book value may not be a feasible base for calculation if the asset’s ownership is by way of inheritance and not by purchase. Also, the value of assets in the real estate market keeps fluctuating. Therefore if the assets are purchased recently, or there is no major difference between the purchase price and market price, we may go ahead with book value. Otherwise, we should take the current market price of the property to take a realistic view of the capitalization rate and available opportunities.
Gross Income – Enter the amount of gross income. The income on the investment before paying any expenses is its gross income. Gross income means the total potential income; the asset is able to generate less any loss due to vacancy or non-clearance of payment.
Operating Expenses – Operating expenses include costs we incur to operate and maintain properties in order to earn income from them. It includes property taxes, maintenance fees, insurance premiums, etc. But, this does not take any financial charges into account (due to the assumption of no loan taken). Depreciation also does not form a part of it.