What Is Direct Capitalization?
Direct capitalization converts a single year's stabilized net operating income directly into an estimate of value by dividing it by a market-derived cap rate — the simplest form of the income approach.
Formula
Value = Stabilized NOI ÷ Cap Rate
Why It Matters
Direct capitalization is faster than a full multi-year discounted cash flow analysis, but it assumes income and the cap rate stay reasonably stable — a full DCF is usually preferred for properties with uneven income, like a building with several leases expiring at different times.