What does "cap rate" measure in real estate?

The correct choice measures the rate of return on a property investment based on the income it generates. The cap rate, or capitalization rate, is a crucial metric in real estate that helps investors assess the potential profitability of an investment property. It is calculated by taking the net operating income (NOI) of a property and dividing it by the property's current market value or acquisition cost.

This calculation provides investors with a percentage that indicates how much income they can expect to earn relative to the price of the property, assisting in comparing different real estate investments. A higher cap rate typically suggests a higher potential return on investment, which is particularly valuable in evaluating whether a property is a good investment opportunity. By focusing on the income generated by the property rather than other factors, the cap rate serves as an essential tool for decision-making in real estate investment.