What does the term 'capitalization rate' typically refer to?

The term 'capitalization rate,' often referred to as the "cap rate," is a crucial concept in real estate investment and property management. It represents the relationship between the income that a property generates and its value. Specifically, the cap rate is calculated by dividing the net operating income (NOI) of a property by its current market value or purchase price.

This ratio helps investors determine the potential return on investment for a property. A higher cap rate indicates a potentially higher return on investment relative to the property's value, which can signal a greater risk or a more appealing investment opportunity depending on various factors.

Understanding cap rates is essential for property managers and investors, as they assess property performance and make informed decisions about buying, selling, or holding properties within their portfolios.