Capitalization rate is a rate which is used to measure the ‘economical effectiveness’ of a property, i.e. the (potential) profitability of a piece of real estate. It is also used to compare a number of properies. There are several formulas to calculate the rate, but the most straightforward way is to divide its annual net operating income with its cost or value. The actual parameters involved in the calculations may change based on each property agent’s preference.