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# How To Calculate Capitalization Rate For Real Estate – DC Fawcett

### DC Fawcett Virtual Real Estate investing club

Real estate investors should have a method to derive the property value they’re going to buy. This is required as many times; a person ends up paying more than the expected price which reduces the profit when they are selling the property. The Capitalization rate is determined on the basis of the income from other properties and the recent selling price.

DC Fawcett has advised the investors to use this formula to get the exact value.

### What is Capitalization?

It is the rate of return on real estate investment property based on the income you expect the property to generate. In other words, the capitalization rate is used for determining the investor’s potential income on their investment. DC Fawcett Virtual Real Estate Investing Club.

### Capitalization Rate Calculation

1. You can derive the capitalization rate by dividing the net operating income on the investment by the property’s current market value. Here is the formula:

Capitalization rate=Net Operating Income/Current market value.

For example, if the recent selling price of a property is \$4, 00,000 and the net operating income is \$20,000, the capitalization rate has to be calculated.

1. Divide the NOI by selling price to get the capitalization rate, i.e. \$20,000/4, 00,000 = 0.05 or 5%. All that you need is a calculator.

### Selling the property

You should know what price to fix for selling the property taking all the expenses and the cost price into consideration. For instance, you own a small apartment or the plot and want to sell it. However, you do not have the idea of what rate the property has to be sold. For this, you need to check the current rate for the property similar to yours. Though you find the property sold three or four months back, the catch is about the net operating income which is sometimes published in the listing. If you get three property cap rates on an average of 9% and your net operating income is \$36,000, the NOI cap rate is:

\$36,000/0.09 = \$4, 00,000 which is your property value.

The decision is entirely yours whether to ask for the price for the property or take it from the market.