How is the "cap rate" in commercial real estate calculated?

The cap rate, or capitalization rate, in commercial real estate is calculated by dividing the net operating income (NOI) by the property value. This formula provides insight into the potential return on investment for a property. The net operating income represents the income generated from the property after deducting all operating expenses, excluding mortgage payments and taxes. The property value can be determined by various means, such as a recent appraisal or the purchase price.

Using this calculation helps investors assess the risk and potential profitability of real estate investments. A higher cap rate may indicate a higher level of risk or a higher potential return, while a lower cap rate typically suggests a more stable investment with potentially lower returns. This metric is essential for comparing different real estate investments and making informed decisions.

The other choices do not accurately reflect how cap rates are determined or focus on aspects that fall short of capturing the core concept of measuring investment efficiency in real estate.