Capitalization rate, also known as cap rate, is a real estate valuation measure used to compare different real estate investments. It is a ratio between the annual rental income produced by a real estate investment and the propertys value. The formula for calculating the cap rate is: Capitalization Rate = Net Operating Income / Current Market Value. The cap rate is expressed as a percentage and is an indirect measure of how fast an investment will pay for itself. A higher cap rate indicates a higher level of risk, while a lower cap rate indicates lower returns but lower risk. The cap rate is used to measure the profitability of commercial rental properties. It is a tool for investors to use for roughly valuing a property based on its Net Operating Income. However, it does not take into account future risks, such as depreciation, or structural changes in the rental market that could cause income fluctuations.