What is the primary purpose of direct capitalization?

The primary purpose of direct capitalization is to convert property income into capital value. This method is widely used in real estate valuation, particularly for investment properties, where the income generated by the property is a crucial factor in determining its overall worth.

By using direct capitalization, an investor can take the net operating income (NOI) of a property and divide it by a capitalization rate (cap rate) to arrive at the property’s value. This approach lays the groundwork for estimating how much an investor should be willing to pay for a property based on the expected income it can generate.

The focus on income as a measure of value reflects the fundamental principle of real estate investments: the value of a property is inherently linked to its ability to produce revenue.