To what does the term "capitalization rate" refer in real estate?

The term "capitalization rate" refers to the ratio of net operating income (NOI) to the property's value. This rate is a critical metric used in real estate to evaluate the potential return on an investment property. By dividing the annual net operating income by the property's current market value or acquisition cost, investors can assess how well a property is likely to perform financially.

The capitalization rate effectively provides insight into the relationship between income generated from the property and the amount of investment made in it. A higher capitalization rate indicates a potentially higher return on investment but may also suggest higher risk or less desirable property conditions. Conversely, a lower capitalization rate might indicate a safer, more stable investment or a property in a desirable area with strong income potential.

In contrast, the expected future value of a property refers to projections based on various factors but does not directly convey the relationship between current income and property value. The risk level associated with an investment pertains to the uncertainties and potential for loss rather than the income generation aspect. Lastly, the current market rent focuses on the income potential of leasing the property rather than the overall financial return perspective encapsulated by the capitalization rate.