Capitalized value is the current worth of an asset, usually real estate, based on a calculation of expected income from the asset over the course of its economic lifespan. Capitalized value is a useful tool for investors to decide whether an asset is a good investment. Normally, capitalized value is estimated by dividing the expected yearly income by the capitalization rate and reducing the sum by a discount rate in order to accurately reflect the present value. The discount rate is needed because the calculation shows future income, and under the time value of money concept, future money is worth less in current money because of inflation and missed interest opportunity. The discount rate is calculated using different methods but usually is determined based on the foregone interest the money could have accrued in other investments.
As an example, a real estate company wants to invest in a townhouse that generates $20,000 a year with a capitalization rate of 8% and a discount rate of 10%. The capitalized value would be $225,000 ($20,000 ÷ 8% = $250,000*90% = $225,000).
[Last updated in June of 2021 by the Wex Definitions Team]