A capitalization rate indicates what expected rate?

The capitalization rate is a vital concept in real estate appraisal and investment analysis, reflecting the expected rate of return on an investment property. It is calculated by dividing the net operating income (NOI) of a property by its current market value or purchase price. This relationship demonstrates how much return an investor can anticipate receiving relative to the property's value.

Choosing the rate of return on investment accurately captures the essence of what the capitalization rate conveys. Investors utilize this rate to help determine whether a property meets their investment criteria and to compare potential investments. A higher capitalization rate suggests a potentially higher return, indicating a riskier investment, while a lower rate typically signifies lower risk and lower potential returns.

Understanding capitalization rates is crucial for making informed decisions in real estate, as they help assess the profitability of income-generating properties. Hence, the choice reflecting the expected rate of return on investment aligns perfectly with the definition and application of the capitalization rate in real estate appraisal practice.