What is the definition of "capitalization rate" (Cap Rate)?

The definition of "capitalization rate," commonly referred to as the Cap Rate, relates to the assessment of a property's potential return on investment. It is calculated as the ratio of a property's net operating income (NOI) to its current market value or purchase price. The Cap Rate helps investors gauge the potential profitability of real estate investments and assess the comparative value of different properties.

By calculating the Cap Rate, investors can understand how much income they can expect to generate from a property relative to its cost. A higher Cap Rate typically indicates a potentially higher risk but may also signal a higher return, whereas a lower Cap Rate may suggest less risk and possibly lower returns. Understanding the Cap Rate is essential for making informed investment decisions in real estate.