The overall capitalization rate is calculated using which formula?

The overall capitalization rate, often referred to as the "cap rate," is a fundamental concept in real estate valuation used to assess the potential return on an investment property. It is specifically calculated by taking the net operating income (NOI) of a property and dividing it by the property’s value or sale price. This calculation provides investors with a way to compare the profitability of different investment properties on a consistent basis.

Using net operating income for this formula is essential because it represents the property’s income generated from operations, excluding financing and tax costs. By dividing the income by the property's market value, you establish a percentage that indicates the yield an investor could expect on that property based on its current income stream—allowing for straightforward comparisons across various investments.

Regarding the other choices, while they are related to property income and expenses, they do not reflect the commonly accepted formula for determining the overall capitalization rate. For example, dividing NOI by market rental rates does not account for the actual market value of the property, and other options involving management fees or cost of capital introduce aspects not directly relevant to the cap rate calculation. Thus, the correct understanding hinges on the link between NOI and property value as the basis for the overall capitalization rate.