Capitalization Rate, commonly known as Cap Rate, is a crucial metric in real estate investment that assesses the potential return on a property. It is calculated by dividing the property’s net operating income (NOI) by its current market value or acquisition cost. The resulting percentage reflects the rate of return an investor can expect to generate from the property annually.

Cap Rate is a fundamental tool for investors seeking to evaluate the profitability and risk associated with a real estate investment. A higher Cap Rate generally suggests a higher potential return, but it may also indicate increased risk. Conversely, a lower Cap Rate may imply a more stable investment with lower risk but potentially lower returns.

Investors use Cap Rate to compare different investment opportunities and make informed decisions based on their risk tolerance and financial objectives. It provides a clear and standardized way to assess the financial performance of diverse properties, aiding investors in selecting assets that align with their investment strategies.