Direct answer
What does capitalization mean?
Capitalization is the process of converting income into an indication of value.
Exam cue: Direct capitalization commonly divides stabilized net operating income by a market-derived capitalization rate.
What does it look like in a question?
Example
Annual NOI of $60,000 divided by an 8 percent rate indicates $750,000.
Common exam trap
What should you not confuse it with?
Capitalization rate is not a mortgage interest rate.
Related valuation terms
AppraisalAn appraisal is an opinion of value developed by a qualified appraiser for an identified use, property interest and effective date.ComparableA comparable is a property used as market evidence because it is sufficiently similar to the property being analyzed.Comparative market analysisA comparative market analysis (CMA) is a broker's analysis of relevant market data to help a seller or buyer consider a probable price range.Cost approachThe cost approach is a valuation approach that adds land value to the depreciated cost of the improvements.DepreciationDepreciation is a loss in property value from physical deterioration, functional obsolescence or external obsolescence in appraisal.External obsolescenceExternal obsolescence is a loss in value caused by influences outside the property.
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