What does the cap rate measure in real estate?

The cap rate, or capitalization rate, is a vital metric used in real estate to assess an investor's potential return on an investment property. It is calculated by dividing the net operating income (NOI) of the property by its current market value or acquisition cost. This calculation provides a percentage that indicates the expected rate of return on the property, making it an essential tool for investors when evaluating different real estate opportunities.

By focusing on the relationship between the income a property generates and its value, the cap rate helps investors compare the profitability of various investments. A higher cap rate might suggest a higher potential return, which could be appealing, especially in markets with greater perceived risks. Conversely, a lower cap rate may reflect a more stable, lower-risk investment environment.

This understanding allows investors to make informed decisions about where to allocate their capital based on their investment strategies, risk tolerance, and market conditions. Therefore, option B accurately encapsulates the primary purpose of the cap rate in real estate investment analysis.