Definition

A capitalization rate (or Cap rate) is an estimate of an investor’s potential return on her investment and is often used as a starting point to compare investment opportunities. It is calculated by dividing yearly income the property will generate by total value of an investment (Cap rate = Yearly Income/Total Value). Other factors, however, such as the growth or decline of the potential income, the increase in value of the property, need to be taken into account to make a fully informed decision when considering investment opportunities.