Remember: One correct or official capitalization rate does not exist. Different rates are used at different times.
Essentially, the capitalization rate is the rate of return you wish to receive from the asset or business. When determining what capitalization rate to use, consider the following:
- The smaller the capitalization rates, the higher the value.
- Less risky investments (such as a stable business with large capital asset bases and strong financial history) are generally assigned lower capitalization rates.
- A business that relies on the presence of only one or two key people is generally assigned a higher capitalization rate.