What is the most commonly used capitalization rate?

The most commonly used capitalization rate in the appraisal profession is the overall rate. This rate is essential for converting a property’s income into an estimate of value and is widely utilized in real estate appraisal and investment analysis. It accounts for the total return on investment, including both the income and resale value of the property over time.

The overall capitalization rate typically reflects the return an investor expects from the entire property, encompassing expenditures and risks associated with the investment. By using the overall rate, appraisers are able to assess properties more accurately and provide valuations that align with market expectations.

The other rates mentioned do serve important roles in financial analysis; for example, the income rate focuses exclusively on the income produced from a property, while the composite capitalization rate may integrate multiple different income streams or factors. However, they do not capture the comprehensive view of property valuation as effectively as the overall capitalization rate. This specificity makes the overall rate the go-to choice for appraisers when determining a property’s estimated value based on its expected income.