<--Back to Wiki Home

Define Equity Capitalization Rate in Real Estate

Equity Capitalization Rate: 

Equity Capitalization Rate, or Equity Cap Rate, is a percentage that helps investors figure out how much money they can expect to make from a property in relation to their share of ownership. It's a way to compare different investment properties and decide which one is likely to give them the best return on their investment. (also known as the Equity Dividend Rate)

Formula: 

Re-formula.png

Example: 

For example, let's say an investor is considering two properties. Property A costs $1,000,000 and is expected to generate $100,000 in income after expenses each year. Property B costs $800,000 and is expected to generate $75,000 in income after expenses each year. To find the Equity Cap Rate for each property, we divide the income by the property's cost: Property A has a 10% Equity Cap Rate ($100,000 / $1,000,000), and Property B has a 9.375% Equity Cap Rate ($75,000 / $800,000). In this case, Property A has a higher Equity Cap Rate, which might make it a more attractive investment.

Note: Equity Capitalization Rate is typically calculated using pre-tax income. It represents the return on investment before taxes are taken into account. However, investors should also consider their specific tax situation when evaluating investment opportunities, as taxes can have a significant impact on the actual return they receive.

"Wit & Whimsy with the Dumb Ox: Unlocking Knowledge with Rhyme:"

In the world of investments, where properties grow,
Equity Cap Rate is a number to know.
It's a way to compare, and decide where to spend,
Your hard-earned money, for returns in the end.

Two properties there were, A and B,
Each with a price, and income to see.
Divide the income by cost, and what do you find?
Equity Cap Rate, to help make up your mind.

Property A had ten percent, and B had nine,
A number to compare, and help you define,
Which investment to choose, to make your wealth climb,
Equity Cap Rate, a tool for the times.