What it is:
How it works (Example):
Let's say Jane Doe buys a house to rent out for extra mortgage at 5% to pay for it, meaning her payments are $536 per month, her property work out to $165 a month, and the insurance on the place runs $60 a month, for a total outlay of $761. She rents the house out for $1,000 a month.. The house costs $100,000. She borrows a 30-year
Using this information and the formula above, we can calculate that Jane's capitalization rate for this property is:
Capitalization Rate = (($1,000 - $761) * 12 months)/$100,000 = 2.868%
Why it Matters:
Capitalization rates allowinvestors to place values on income-producing properties. The formula is also a way to estimate what similar income-producing properties should sell for.