What does the capitalization formula help to calculate in real estate?

The capitalization formula is a fundamental tool in real estate finance used to calculate the income generated by a property. It involves dividing the net operating income (NOI) of a property by its current market value or purchase price, effectively expressing the relationship between income and value in percentage terms. This calculation helps investors assess the potential profitability of an investment property, allowing them to make informed decisions regarding purchases or valuations.

The focus of the capitalization formula is specifically on income generation, making it essential for real estate investors looking to understand the return on their investments. Other aspects, such as overall market conditions, debt levels, or future property appreciation, are influenced by various market dynamics, but the capitalization formula is specifically tailored for evaluating income potential.