Kovats Real Estate School Practice Test 2026 – Complete Exam Guide

The capitalization rate, commonly referred to as the CAP rate, is a crucial metric in real estate that helps investors evaluate the profitability of 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 ratio provides insight into the expected return on investment and assists investors in comparing the desirability of different properties.

A higher CAP rate typically indicates a potentially higher return but may also suggest a higher level of risk associated with the property. Conversely, a lower CAP rate often signifies a lower return and usually reflects a more stable and less risky investment. Understanding the CAP rate enables investors to make informed financial decisions regarding property acquisition and performance evaluation over time.