Investors, lenders and appraisers use Capitalization Rate (also known as cap rate) to form their opinions about the value of an income producing property.

 Cap rate is the rate of return they expect from an investment. To estimate the price an investor would be willing to pay, divide the net operating income generated by the cap rate they would expect, expressed as a percentage. For example, if a property will generate $100,000 per year, and an investor wants a 10% return, they should be willing to pay $1,000,000 (100,000 / 10% = $1,000,000).

Capitalization rate is a good starting point to compare investment opportunities, but there are numerous other aspects to be considered. Expected future growth or decline of the potential income, expected changes in the overall property market, and alternative investments available are a few other factors.