Capitalization Theory

Capitalization Theory is a method used in real estate valuation to estimate the value of a property based on its income-generating potential. It involves dividing the property's net income by a capitalization rate (a rate of return reflecting market risk and return expectations). Essentially, this approach translates the property's ability to produce income into an estimate of its current market value. It assumes the property's income flow remains consistent over time and provides a straightforward way for investors and appraisers to determine value based on expected earnings.