Cap rate is an abbreviation for capitalization rate, which refers to the ratio between the net operating income (NOI) of a property and its current market value. In other words, it represents how much return an investor can expect from purchasing an income-producing property based on its current market price.
The cap rate is calculated by dividing the NOI by the market value of the property: Cap Rate = Net Operating Income / Market Value. This metric provides a way for real estate investors to compare and evaluate potential investments, as properties with higher cap rates are generally considered better investments because they offer more potential return on investment.
In summary, cap rate is an important measure used in the valuation of income-producing properties, providing insight into their expected returns and helping investors make informed decisions about real estate investments.