Capitalization rate

Okay kiddo, so you know how when you have some money, you can use it to make even more money? Well, Capitalization Rate is kind of like that.

When grown-ups talk about Capitalization Rate, they usually mean the rate of return a person could expect to make on an investment property, like a building or a house they rent out to people.

So imagine that someone has a rental building that makes $100,000 a year in rent. If they want to figure out how much that building is worth (how much money they could sell it for), they need to use the Capitalization Rate.

Basically, the Capitalization Rate helps you figure out how much money you would need to invest in order to make the same amount of money as the rental property. So if the buyer wants a 10% return on their money, they would multiply the $100,000 in rent by 10% (0.1) and get $1,000,000. That means the building would be worth $1,000,000 to the buyer.

So, the Capitalization Rate is like a big grown-up calculator that helps people figure out how much an investment property is worth based on how much money it will make them in the future.