What is the formula for calculating cap rate when determining land value?

The formula for calculating the capitalization rate, or cap rate, is derived from the relationship between the net operating income (NOI) of a property and its current market value. The correct formula expresses the cap rate as property NOI divided by current market value.

When determining the value of land or real estate investment, the cap rate serves as a measure of the expected return on investment. By dividing the NOI by the current market value, this formula provides a clear percentage that indicates what return an investor can expect based on the income generated by the property relative to its value. A higher cap rate suggests a higher potential return, but it may also indicate higher risk, while a lower cap rate suggests a lower risk and lower return.

The other options involve different relationships that do not accurately represent the cap rate formula. For instance, dividing market value by NOI (as in the first option) would indicate how much market value corresponds to each unit of income, essentially producing the inverse of the cap rate. Similarly, multiplying current market value by cap rate does not calculate cap rate itself but would estimate an income based on a specified cap rate. Lastly, dividing property value by expenses relates to operational efficiency rather than the cap rate. Overall, understanding the correct formulation of the cap