Capitalization rate? I know you’re thinking this is starting to sound complicated; definitely third-year college accounting. Well before you close the book, allow me to explain. First, it sounds way more complicated than it is. In numerical terms, the capitalization rate is the net operating income divided bv the purchase price:
Capitalization Rate = Net Operating Income -T- Purchase Price
So now you’re thinking, “Ken, how can I calculate the capitalization rate when I don’t have a purchase price yet? That’s what I’m trying to figure out through this whole exercise after all. Don’t tell me algebra is involved!” No, algebra is not involved. This is actually really easy. The purchase price here is actually the purchase price trends for a comparable building in your market. So this very complicated sounding word is actually something you can get very easily from brokers, real estate agents, or even the pro forma document for the property. The people in the business—your team members—will either know the capitalization rate for your market or help you calculate it, and that’s all there is to it.
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