What does capitalization refer to in real estate?

Capitalization in real estate specifically refers to the method of converting net operating income (NOI) into the value of a property. This process involves applying a capitalization rate, which is a percentage that represents the expected rate of return on an investment property. By dividing the property's net operating income by the capitalization rate, appraisers and investors can estimate the property's value. This approach is fundamental in income-producing properties, as it allows stakeholders to assess the viability and profitability of real estate investments.

Understanding this method is crucial for appraisers, particularly in the context of investment analysis, because it focuses on the income-generating potential of a property rather than just the physical characteristics or market trends. While evaluating market trends and determining sale prices are important aspects of real estate, they don't involve the direct conversion of income into value as capitalization does. Additionally, calculating property taxes is a different process not related to the valuation method employed in capitalization.