Terminal Capitalization Rate
Categories: Company Management, Bonds
"Mrs. Rate...I have bad news. The test results have come back for your husband, Capitalization. He's...terminal. Yes, very disturbing news, but it's actually against hospital policy to cry here. If you'd like, there's a designated section of the parking lot for that sort of thing..."
Okay, okay. You buy a house that you plan to use as a rental property. You're trying to figure out the total value of the home.
There are basically two factors to that calculation. First, there's the amount you can earn each year by renting it out (and yes, usually you'll ignore taxes). Second, you've got the property's eventual resale value. If you hold the property for 10 years, you'll have the opportunity to collect 10 years' worth of rent. Then, at the end of that time, you can resell the house for some amount.
That resale value at the end of the period is called the terminal capitalization rate (or the terminal cap rate, or the exit cap rate). It's used to project the gross value of an investment property.
See: Cap Rate.
