What is meant by the term "capitalization rate"?

The term "capitalization rate" refers specifically to the method used in real estate and valuation to convert income generated by a property into its overall value. This process involves assessing the income that a property can be expected to produce and applying the capitalization rate to estimate the property's value.

In practice, the capitalization rate is calculated as the ratio of a property’s annual net operating income (NOI) to its current market value (or purchase price). By using this rate, investors can determine how much they should pay for a property based on expected cash flows, facilitating comparisons between different investment opportunities.

This concept is crucial in the context of real estate investment analysis, as it provides a quick way to evaluate the potential return on investment for specific properties. It is distinct from other rates or measures that may pertain to factors like property depreciation or tax assessments, which serve different purposes in property evaluation and management.