Which financial measure is used to assess the worth of an investment property?

The cap rate, or capitalization rate, is a crucial financial measure used to evaluate the worth of an investment property. It represents the relationship between the net operating income (NOI) generated by a property and its current market value or purchase price. The cap rate is expressed as a percentage and provides investors with a way to compare the relative value of various real estate investments.

Calculating the cap rate involves dividing the net operating income by the property's market value. This ratio helps investors determine how quickly they can expect to earn back their investment through the income generated by the property. A higher cap rate indicates a potentially better return on investment, assuming other factors remain constant. This makes it a vital tool for investors looking to make informed decisions in the real estate market.

While cash flow, rate of return, and net operating income are important concepts in real estate investment, they each serve different analytical purposes. Cash flow focuses on the actual income available after all expenses are paid, while rate of return evaluates the profitability of an investment relative to its cost. Net operating income is the total income from the property minus operating expenses, and while it's a necessary component in calculating the cap rate, it is not a standalone measure used for assessing property worth. The cap rate effectively encaps