What is the correct formula for calculating the Cap rate?

The correct formula for calculating the Capitalization Rate, or Cap Rate, is derived from the relationship between Net Operating Income (NOI) and property value. The Cap Rate is a key metric used in real estate to assess the potential return on an investment property.

To calculate the Cap Rate, you take the Net Operating Income, which represents the income generated from the property after all operating expenses have been deducted, and divide it by the property's current market value. This can be expressed as follows:

Cap Rate = Net Operating Income / Value

This formula allows investors to determine the yield on a property relative to its value, providing a quick way to compare the profitability of different real estate investments. A higher Cap Rate typically indicates a potentially higher return on investment, while a lower Cap Rate may suggest a property is overvalued or presents lower current income relative to its price. Thus, C accurately reflects this crucial ratio in commercial real estate analysis.