====== Capitalization Rate (Cap Rate) ======

The **capitalization rate (cap rate)** is the **rate of return** used to estimate the **value of income-producing real property** based on its income.

===== Key Characteristics =====
  * Used in the **income approach** to value
  * Expressed as a **percentage**
  * Reflects **risk, return, and market conditions**
  * Higher cap rate = **higher risk / lower value**
  * Lower cap rate = **lower risk / higher value**

===== Formula =====
  * **Cap Rate = Net Operating Income (NOI) ÷ Property Value**
  * **Value = NOI ÷ Cap Rate**

===== Net Operating Income (NOI) =====
  * Gross income minus **operating expenses**
  * Excludes **mortgage payments, depreciation, and income taxes**

===== Example =====
  * NOI: $50,000
  * Cap rate: 5%
  * Value = $50,000 ÷ 0.05 = $1,000,000

===== Exam Tip =====
  * Cap rate is a **rate of return**, not an interest rate
  * Used only for **income-producing** property