What is the formula for calculating capitalization or NOI?

The formula for calculating capitalization or Net Operating Income (NOI) is commonly represented as R = I / V x 100. In this formula, R stands for the rate of return or capitalization rate, I represents the income generated by the property (usually NOI), and V indicates the value of the property. This formula effectively illustrates how to assess the relationship between income and property value to determine the capitalization rate, which is a crucial metric in real estate for evaluating investment performance.

By rearranging this equation, one can understand that to determine how efficiently an investment is producing income relative to its value, the income (I) is divided by the property's value (V), and then multiplied by 100 to express that rate as a percentage. This percentage helps investors make informed decisions about the viability and attractiveness of potential property investments.

In real estate, understanding this calculation allows property managers and investors to estimate the potential returns on properties, comparing different investment opportunities to determine which ones might yield the best financial benefits.