Capitalization rate (or “Cap Rate”) is a real estate valuation measure used to compare different real estate investments. A cap rate is calculated as the ratio between the net operating income (after fixed and variable costs expenses) produced by an asset and the original capital cost (the price paid to buy the asset) or alternatively its current market value. For example, an apartment building that recently sold for $1,000,000 and generates $100,000 in income after expenses has a capitalization rate of 10%.

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