What does the capitalization formula R=I/V represent?

The capitalization formula ( R = \frac{I}{V} ) is a fundamental concept in real estate appraisal, particularly in assessing the value of income-generating properties. In this formula, ( R ) stands for the capitalization rate, which is a measure of the expected rate of return on an investment. ( I ) represents the income generated by the property, which could be rental income or any other form of revenue. ( V ) denotes the value of the property.

By dividing the income ( I ) by the value ( V ), the formula effectively expresses how much income an investor can expect to receive relative to what they have invested in the property. This ratio is crucial for appraisers and investors because it helps them compare different investment opportunities and determine whether a property is a sound investment based on its income potential.

This understanding of the relationship between income and value is essential for making informed decisions in property appraisal and investment. Therefore, knowing that the capitalization rate is the income divided by the property value allows appraisers to evaluate a property's financial performance and make comparisons across similar investment options.