Similar to the price-to-earnings ratio of a stock, the capitalization rate is calculated by dividing earnings by the price of a property and is shown as a percentage. Earnings in this case are equal to net operating income and do not include operating costs. Market value can also fluctuate and affect the rate by changing the value of the property.
A low percentage is representative of a higher purchase price compared to the income generating ability of the property. Also known more simply as the cap rate, the capitalization rate is generally used by potential investors to estimate the return on a property.