Which of the following best describes the term “cap rate”?

The term “cap rate,” or capitalization rate, is best described as the ratio of income to the property price. Specifically, the cap rate indicates the expected rate of return on an investment property based on the income it generates. This metric is calculated by taking the net operating income (NOI) of the property and dividing it by the current market value or purchase price of the property. The resulting percentage helps investors evaluate the potential profitability of a real estate investment, enabling them to compare different properties or investments effectively.

Understanding the cap rate is vital for appraisers and investors, as it reflects the income-generating ability of a property relative to its market value, guiding decisions on purchasing or valuing investment properties.