The calculation of the value of a real property whereby annual project income is divided by a given annual rate (known as the capitalization rate or for short as cap rate). Capitalization is the worth (value) of a real estate property, applying the capitalization rate- which, per se, is determined by dividing a property’s net operating income (NOI) by its current market value. This rate, expressed as a percentage, is an estimation for the potential return on a real estate investment. For example, a building that generates an annual project income of $200,000 would be worth $2,000,000 at a 10 percent capitalization rate:

Capitalization= annual income × capitalization rate

Capitalization= $200,000 × 10% = $2,000,000