What is the capitalization rate?

The capitalization rate is essentially the rate that is used to convert income into a value that is realized on the asset. Perhaps the easiest way to devise the rate of capitalization is to consider the ratio between the original cost of obtaining an asset compared to the amount of income that is created within the set time frame. From this point of view, however, the rates of capitalization may be as an asset of earnings associated with the ownership of the asset.

The calculation of the rate of capitalization follows a very simple process. Basically, everything that is needed is to know the capital costs of the asset and the total amount of income generated by the asset in the given period. The calculation of the ratio between these two numbers is determined by the capitalization rate for the asset. Some investors give you a rate for a specific financial period such as monthly or quarterly. Comparison of results may indicate whether there has been a change in the rate of capitalization from one period to another, which can help the investor determine whether it is worth the effort to hang up onasset.

Understanding the rate of capitalization concerning normalized earnings can also help the investor project future incomes that can be expected from the asset. When creating future projects, the investor may also want to play with a discount rate of capitalization, set up a number on the calculated rates from different periods and by means of diameter. Within the process, the investor may want to take into account various factors that could affect the rate of capitalization in future periods. Among these factors would be fluctuations in the stock market, changing economic conditions, Shifts in consumers' preferences and increased competition on the market.