Direct Capitalization
Direct capitalization is an income approach technique that converts a single-period income measure (commonly NOI) into a value indication by dividing by a capitalization rate (or applying an overall rate). It is typically used when income is expected to be relatively stable or can be stabilized into a representative level.
- Where it applies
- Generally, not specific to New York
- When it comes up
- Underwriting; valuation
- Property types
- Income-producing assets
In practice
A cap rate is not a discount rate; treating the two as interchangeable is a modeling error that distorts value.
Related terms
Valuation and Appraisal
- Appraisal Standards of Professional Practice
- Capitalization Rate (Cap Rate)
- Discounted Cash Flow (DCF) Analysis
- Income Approach
- Present Value (PV)
- Sales Comparison Approach
- Uniform Standards of Professional Appraisal Practice (USPAP)
General information, not legal, tax or financial advice.