Capped Rate (Capitalization Rate)

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Capped rate is also called as the capitalization rate. It is calculated and defined as the ratio and percentage division of the profit or income which is obtained by the asset to the income to the income obtained from the capital cost of the specific product.

Calculation of capped rate

Alternatively the market price and value of the object can also be included in the ratio calculation to make out the capped rate. It is not at all difficult to calculate the rate of the product by finding out the original price which is paid by the buyer and the market value. If thee prices and values are known then one can easily calculate the capped rate on any product.

An illustration of capped rate calculation

Whether you make a purchase of any large item or a small product, the way to calculate the capped rate is very simple and easy. The simple way of this calculation can be shown by a simple illustration. Suppose if you intend to purchase a building or any other commodity, and the sale price of this building is about $100,000 then first of all it is important to determine the profit on that rate. After that the fixed costs is determined which according to calculations is supposed to be about 10 percent of the original amount.

Inclusion of variable costs

All the variable costs are subtracted from this amount and as a result the capitalization rate or capped rate is calculated which comes out to be finally 10 percent. According to this calculation of capped rate, it is made compulsory to pay the calculated amount by the preceding year. The time span is also considered while paying the capped rate and the original amount of the product or commodity.

Increase in capped rate

The more time is passed on buying the product, the more will be its capped rate. For example at the same price, with the increased time span the capped rate will become about 50 percent. It is now up to the investor that how does he keeps his money tied up in this investment and keeps up to the track. There are several ways to take into account this and other opportunities. 

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