Which type of property generally has a higher cap rate?

The correct choice illustrates that commercial properties generally have a higher capitalization rate, often referred to as cap rate. The cap rate is a metric used to evaluate the potential return on an investment property and is calculated by dividing the property's net operating income (NOI) by its current market value or purchase price.

Commercial properties tend to have higher risk and therefore the potential for higher returns, leading to higher cap rates. Investors typically expect to see a greater return on their investment due to factors such as tenant turnover, economic fluctuations, and potential vacancies, which can be more pronounced in commercial real estate compared to residential options.

In contrast, other property types such as residential properties and luxury homes usually experience lower cap rates. This is often due to their stable income streams and lower associated risks, making them less attractive for higher returns compared to commercial real estate. Vacant land may have no immediate income generation, complicating cap rate calculations, further distinguishing its investment profile from that of commercial properties. Understanding these nuances helps investors make informed decisions based on expected returns relative to the perceived risk of their investments.