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How to calculate Capitalization Rate for Real Estate
Real estate investors need to have a method to determine the value of a property they’re considering buying. The most accurate way to do this is by determining the properties’ actual operating income and comparing it to the purchase price of the property. The capitalization rate is determined and then applied to the property in question to determine current value based on income.
1. Determine the Purchase Price of your Real Estate Investment, such as a Vacation Rental property.
- Vacation Rental Price = $850,000
2. Determine the NET operating income, realized by the property owner.
- NET Income (after expenses) = $42,500
3. Divide the Net Operating Income by the Properties’ Purchase Price to get Capitalization Rate.
- $42,500 / $850,000 = .05 or 5% (Cap Rate)
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