Which measure is used to evaluate the performance of an investment in real estate by relating income to value?

The capitalization rate, often referred to as the "cap rate," is a key metric in real estate that investors use to evaluate the performance of an investment property. It is calculated by dividing the net operating income (NOI) generated by the property by the current market value (or acquisition cost) of the property. This ratio provides insight into the relationship between the income the property produces and its value, offering a quick way to assess the return on investment.

A higher capitalization rate typically indicates a better return, at least compared to properties with lower cap rates, making it easier for investors to compare multiple investment opportunities. The cap rate assists in determining whether a property is overpriced or a good deal and is particularly useful when looking at similar types of properties in the same market.

While return on investment (ROI) is a more general term that looks at the total gain or loss made on an investment compared to the amount invested, it does not specifically relate income to property value in the way that the cap rate does. Yield is similar but can have different interpretations in various contexts. The price/earnings ratio is primarily used in stock valuation, making it less relevant for real estate evaluations. Therefore, the cap rate stands out as the most appropriate measure for evaluating