In real estate, what does a property’s cap rate indicate?

The cap rate, or capitalization rate, is a key metric in real estate investment that indicates the relationship between a property's net operating income (NOI) and its current market value. This ratio is calculated by dividing the net operating income by the property’s value or purchase price. A higher cap rate suggests that the property generates more income relative to its value, which can indicate a potentially better return on investment.

Understanding the cap rate is crucial for investors as it helps in assessing the profitability and risk associated with a particular property. It can also assist in comparing different investment properties, as it provides a standardized way to evaluate income potential relative to property price. By focusing on the net operating income, which accounts for operating expenses but excludes financing costs, investors gain a clearer picture of the property's performance and overall investment appeal.