What is the Capitalization Rate?
In, a capitalization rate is a measure of return on . The formula for capitalization rate is:
How Does the Capitalization Rate Work?
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 Does the Capitalization Rate Matter?
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.
Personalized Financial Plans for an Uncertain Market
In today’s uncertain market, investors are looking for answers to help them grow and protect their savings. So we partnered with Vanguard Advisers -- one of the most trusted names in finance -- to offer you a financial plan built to withstand a variety of market and economic conditions. A Vanguard advisor will craft your customized plan and then manage your savings, giving you more confidence to help you meet your goals. Click here to get started.
Read This Next
One of the most interesting elements in the evolution of the ETF marketplace has...Read More →
In a workforce in which employees often are instructed to do more with less, it seems "work-life balance" has become almost synonymous with job satisfaction. This three-...Read More →
Who doesn't want to become a millionaire? Even though the value of a million bucks is debatable -- since inflation continues to erode wealth...Read More →