What does the term 'Cap Rate' refer to in property appraisal?

'Cap Rate' refers to the rate of return on a real estate investment property. It is a critical metric used in property appraisal as it helps investors evaluate the potential profitability of a real estate investment. The cap rate is calculated by dividing the net operating income (NOI) of a property by its current market value or purchase price.

This measurement offers insight into the risk associated with an investment property. A higher cap rate typically indicates a higher return and possibly greater risk, while a lower cap rate suggests a lower return but potentially a safer investment. Understanding cap rates enables investors to compare different investment opportunities and make informed decisions based on expected income relative to the property value.

Other terms from the choices, such as total operational costs, selling costs, and occupancy rates, do not directly relate to measuring the return on investment for a property. Operational costs would factor into the net operating income but do not define the cap rate itself. Selling costs arise during the disposition of a property and are not related to its valuation or profitability assessment as represented by the cap rate. Occupancy rates provide information about tenant demand and rental income potential but do not directly measure investment returns. Thus, the definition of cap rate is clearly focused on return on investment, making it the correct