What does the capitalization rate help investors determine?

The capitalization rate, often referred to as the "cap rate," is a key metric used by real estate investors to assess the expected profitability of a property. It is calculated by dividing the net operating income (NOI) of a property by its current market value or purchase price. This ratio provides insight into the potential return on investment, allowing investors to compare the profitability of various properties.

By using the cap rate, investors can gauge how much income a property is likely to generate relative to its price. A higher cap rate generally indicates a potentially higher return on investment, whereas a lower cap rate may suggest a lower expected return or a property priced at a premium compared to its income-generating abilities. This makes the capitalization rate an essential tool for investors when making decisions about purchasing or evaluating investment properties in the real estate market.

The other options, while relevant to real estate, do not directly relate to the primary use of the capitalization rate. For example, resale value is influenced by various factors including market conditions and property enhancements, but it is not determined directly by the cap rate. Similarly, property taxes depend on local tax laws, and tenant turnover is related to property management and tenant relations rather than financial evaluation through cap rates.