It stands for overall capitalization rate; the ratio of a property’s net operating income (NOI) to its value (capital invested). This rate is used for valuation: as a component of the income approach, it provide an estimate of a property value that is derived from by the summation of net operating income (NOI) for a year, and relating the figure to the value of the property. In equation form:
Value = NOI / Overall capitalization rate
This rate is expressed as a percentage. In calculation, it uses both the rate of return (ROR) of investment and rate of return on investment. It is used to estimate value based on income. The relationship of this rate to value is the income to rate (IRV): “income divided by rate is value” or in short, (I/R = V). As the overall capitalization rate decreases, the value increases, and vice versa.
It is also referred to as overall rate of return, CAP rate or OCR.
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