The Capitalization Rate (or Cap Rate) is a ratio used in real estate to estimate the value of income producing properties. The cap rate calculation is the net operating income (NOI) divided by the sales price or value of a property, resulting in a cap rate expressed as a percentage. Investors, lenders, and appraisers use the capitalization rate as a tool to estimate the market value for different types of income producing properties.
NOI ÷ Value = Capitalization Rate
NOI ÷ Capitalization Rate = Estimated Market Value
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