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What is a cap rate?

The capitalization, or cap rate, is a term that is used frequently when discussing real estate investments. The cap rate is a ratio including two variables – the net operating income and the current value or sale price of a property. This ratio can help to determine the potential return on an investment. Put another way, the cap rate is the rate at which the net operating income recapitalizes the asset value on an annual basis. The cap rate is a useful tool that is often used to assess real estate investment opportunities and draw conclusions across asset classes.