In the income approach to valuation, what is a 'capitalization rate' (cap rate)?

CAPITALIZATION RATE (CAP RATE): In the INCOME APPROACH to appraising income-producing property, the cap rate is the rate of return used to convert NET OPERATING INCOME (NOI) into VALUE. FORMULA: VALUE = NOI ÷ CAP RATE (the 'IRV' formula: Income = Rate × Value, so Value = Income ÷ Rate); NET OPERATING INCOME (NOI): Gross income minus vacancy/collection loss minus operating expenses (NOT including debt service/mortgage payments or income taxes); EXAMPLE: A property with $100,000 NOI and a market cap rate of 8% (0.08) is valued at $100,000 ÷ 0.08 = $1,250,000; CAP RATE INTERPRETATION: A HIGHER cap rate = lower value (and typically higher perceived risk/lower-quality location); a LOWER cap rate = higher value (lower risk/premium location); cap rates are derived from comparable sales of similar income properties in the market; USES: Estimating value, comparing investments, the income approach to appraisal; the cap rate and the V = NOI ÷ R relationship are fundamental to valuing income-producing property and a key broker national exam concept — it links a property's income to its value.