Capitalisation

The capitalization is the total market value of a property or portfolio, divided among multiple investors who own shares or "fractions" of the asset. It involves valuing the property based on income-generating potential and assigning portions of that value to each investor according to their ownership stake.

Context

In fractional real estate, capitalization is key for evaluating both the property’s value and an investor’s share of the income and appreciation. Investors contribute capital to acquire a fraction of the property, and the cap rate helps assess the property's return potential. The cap rate is calculated by dividing the property’s net operating income (NOI) by its market value. This allows investors to understand how their investment in the fraction will perform, in terms of both income distribution and property appreciation. For fractional real estate, the value of each share can change based on market dynamics, the property's performance, and overall real estate trends, much like traditional stocks in a company.

Example

If a fractionally owned property is valued at $2 million and generates $150,000 in annual NOI, the capitalization rate is 7.5% ($150,000 ÷ $2,000,000). If an investor owns 10% of the property, they would receive 10% of the income and potential appreciation, giving them $15,000 in income for that year. This cap rate helps investors gauge the potential returns relative to their share.