Which term best describes the ratio of annual income earned from a property to its total value?

The term that best describes the ratio of annual income earned from a property to its total value is called the capitalization rate, commonly referred to as the cap rate. This metric is particularly significant in real estate as it helps investors assess the potential return on an investment property.

The calculation of the cap rate is made by dividing the property's annual net operating income (NOI) by its current market value or acquisition cost. This ratio provides a quick way to evaluate the desirability of an investment property compared to similar properties, and it aids in determining whether the property aligns with an investor's expectations for return.

For instance, if a property generates $100,000 in annual income and is valued at $1,000,000, the cap rate would be 10%. This means that the property is generating a return of 10% on the capital invested, which is a vital piece of information for potential investors when considering multiple property options.

The other terms, while related to real estate and investment returns in their own contexts, do not specifically refer to the ratio of income to value in the same way that the cap rate does. Gross income pertains to total income without expenses factored in, yield rate is a broader concept that can encompass various types of returns,