The rate of return used to estimate property value from a forecasted income is referred to as?

The capitalization rate, commonly referred to as the cap rate, is the rate of return used to estimate the value of a property based on its forecasted income. This metric is essential in the real estate industry as it helps investors determine the potential return on investment of a property.

The capitalization rate is calculated by taking the net operating income (NOI) of a property and dividing it by the property's current market value or acquisition cost. This provides a percentage that indicates how much income a property is expected to generate relative to its purchase price. A higher cap rate typically signifies a higher perceived risk and a better return on investment, whereas a lower cap rate often implies a lower risk and less potential return.

Understanding the capitalization rate is crucial for real estate investors as it assists them in comparing the profitability of various investment opportunities and in making informed decisions regarding property purchases. This context of using income forecasting combined with the cap rate emphasizes its foundational role in property valuation methods.