How is the overall capitalization rate calculated?

The overall capitalization rate is calculated by dividing the net operating income by the sale price of the property. This formula reflects the relationship between the income that a property generates and its value, providing a measure of the expected return on investment. The capitalization rate is a crucial metric in real estate valuation, as it helps investors and assessors evaluate property performance and make informed decisions regarding purchases and investments.

When using this method, the net income represents the total income from the property after deducting all operating expenses, which presents a clearer picture of the property’s profitability. The sale price (or market value) indicates how much the property is worth in the current market.

This calculation helps in comparing the potential return of various investment properties, allowing investors to assess whether a property meets their investment criteria based on the expected yield.