What Is Direct Capitalization?

Direct capitalization converts a single year's stabilized net operating income directly into an estimate of value by dividing it by a market-derived cap rate — the simplest form of the income approach.

Most useful for: Commercial Investor · Appraiser
D
At a Glance
Direct Capitalization
Value=Stabilized NOI÷Cap Rate

Formula

Value = Stabilized NOI ÷ Cap Rate

Why it matters

Direct capitalization is faster than a full multi-year discounted cash flow analysis, but it assumes income and the cap rate stay reasonably stable — a full DCF is usually preferred for properties with uneven income, like a building with several leases expiring at different times.

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This definition is provided for general educational purposes and is not financial, legal, tax, or real estate advice. Verify important decisions with appropriately qualified professionals.

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