What is the definition of capitalization in real estate?

Capitalization in real estate refers to the process of converting income derived from property into value. This method is fundamental in determining the worth of an income-generating property, such as rental apartments or commercial real estate. By evaluating the income that a property produces, along with the expected return on investment, capitalization provides a way to estimate the property's market value.

For example, if a property generates a certain amount of rental income each year, that income can be used to derive the overall value of the property through capitalization rates, which are a reflection of the return expectations of investors. This method is crucial for investors seeking to understand the potential profitability of their investments and to make informed decisions in the real estate market.

The other options do not accurately reflect the concept of capitalization. The notion of converting property into cash is more of a liquidity perspective rather than a valuation approach. Calculation of property depreciation pertains to how the value of an asset declines over time due to wear and tear, which is a different concept related to accounting rather than to the valuation of income. Lastly, the method of assessing property taxes is a process of evaluating property for tax purposes and does not focus specifically on the relationship between income generation and property value.