Understanding Capitalization Rates, Interest Rates, and Yield Rates in Real Estate Valuation
Real estate investing is not as simple as purchasing a property and waiting for its value to appreciate over time. There are various financial concepts and metrics that investors need to understand to make informed decisions. Capitalization rates, interest rates, and yield rates are among the most critical of these concepts. Let’s dig deeper into each of these and gain a better understanding of their significance in the field of real estate.
How Capitalization Rates Affect Real Estate Valuation
The capitalization rate, or cap rate, is a real estate valuation measure used to compare different real estate investments. It is calculated by dividing the net operating income (NOI) by the market value or purchase price of a property.
Cap Rate = Net Operating Income / Current Market Value
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