What does a "Cap Rate" of 7% indicate about an investment property?

A "Cap Rate," or capitalization rate, is a key metric used in real estate investment to assess the potential return on an investment property. A Cap Rate of 7% indicates that the property is expected to generate a 7% return on its investment based on the income it produces relative to its market value.

This metric is calculated by taking the annual net operating income (NOI) of the property and dividing it by the property's current market value or purchase price. For example, if a property generates $70,000 in annual NOI and has a market value of $1,000,000, the Cap Rate would be 7% ($70,000 ÷ $1,000,000 = 0.07 or 7%).

Investors use the Cap Rate to compare the profitability of different real estate investments; a higher Cap Rate typically indicates a higher risk, whereas a lower Cap Rate may suggest a more stable, less risky investment. Therefore, a Cap Rate of 7% signifies a specific level of expected return that can help investors make informed decisions about the property’s income-generating potential.

The other options suggest unrelated scenarios that do not accurately reflect the meaning of Cap Rate in the context of evaluating an investment property