Capitalization rate

The capitalization rate is the rate of return on a property investment. It is calculated as the net operating income earned on a property divided by the current market value of the property. The capitalization rate is used by investors to decide whether the rate of return on an investment is sufficient. However, a key assumption is that the net operating income generated by a property will continue into the future, which will not necessarily be the case as the property ages and requires more maintenance.