capitalisation
rate
The
rate used to value investment
properties. The usual use is as a net annual rate multiplied by the
expected net annual income of the property.
It is derived from sales of comparable
properties:
EXAMPLE
Sale price: $210500
Expected net annual income: $20 000
Capitalisation rate = 210500/20000 =
10.53
10.53 is known as the years purchase
or multiplier. The capitalisation rate = 100/years purchase
100/10.53 = 9.5%
This rate can now be used to value
comparable investment properties with the capitalisation method.