What does the capitalization rate (CAP rate) measure in commercial real estate investment analysis?
Correct Answer
C) The annual return based on net operating income
The CAP rate measures the annual return on investment by dividing the Net Operating Income (NOI) by the property value or purchase price. It represents the yield an investor can expect from the property's income, excluding financing considerations.
Why This Is the Correct Answer
Option C is correct because the CAP rate specifically measures the annual return on investment based on net operating income. The formula is CAP Rate = Net Operating Income (NOI) ÷ Property Value × 100. This calculation provides the annual yield an investor can expect from the property's operations, excluding any financing considerations or future appreciation. The CAP rate focuses solely on the current income-producing capability of the property relative to its value, making it a pure measure of operational return on investment.
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