Capitalization

Capitalization is a mathematical equation that investors use to figure the value of property based on its projected net income. For example, you are interested in purchasing a home and then renting it out to college students. You find a great home that is in an ideal location. The property is close to the center of town and within walking distance of all the amenities. Other rental homes in the area that are the same size usually go for $1,000 per month. This means that when the property stays rented, it has a capitalization of $12,000 per year. Because the capitalization amount is often used to figure the true profit potential of a property, it is often used in conjunction with the regular mortgage to see how much profit an investor will generate from a piece of property.