Capitalization Rate (Cap Rate)

The Capitalization Rate, or Cap Rate, is a formula used in real estate investment to assess a property's potential return on investment. It is calculated by dividing the property's net operating income (income after expenses) by its current market value. A higher Cap Rate indicates a potentially better investment, as it suggests higher returns relative to the property's price. In simple terms, it helps investors evaluate how profitable a property could be, guiding decisions on buying, selling, or holding real estate assets.