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:


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.