What does "capitalization rate" refer to in real estate investment?

The term "capitalization rate" in real estate investment specifically represents the rate of return on an investment property based on the income it generates. It is calculated by taking the net operating income (NOI) of the property and dividing it by the property's current market value or acquisition cost. This rate helps investors assess the profitability and potential return of a property relative to its value or investment cost.

This calculation is crucial because it allows investors to compare different investment opportunities, giving them insight into which properties may offer better returns based on the income generated. By focusing on the income aspect, capitalization rate serves as an essential metric in the evaluation and decision-making process for real estate investments.