Property Investment Basics, Part 3.
Capitalization. When evaluating the worth of an income property based on the value of the income produced, a capitalization rate is applied to the net income. A “Cap” rate is determined by a study of various economic factors, including the returns on other investments, taking into account mortgage, equity components, and risk. That rate of capitalization should be a reflection of the market, i.e., what an investor would require from an investment in a property of similar age, kind, and condition. The resulting rate is then divided into the net income to indicate a value for the property. Next: Tax Impacts.