Capitalization Rate, more commonly known as the CAP Rate, is a financial metric that is used to assess the potential return of an investment. It’s calculated by taking the amount of money expected to be generated from an investment and dividing it by the purchase price of the asset. The result is expressed as a percentage. For example, if an investor purchases a property for $500,000 and expects to generate $60,000 annually from rent, their CAP Rate would be 12%. This figure provides investors with valuable insight into the profitability of an investment, helping them make informed decisions when it comes to investing their capital.