What is a primary purpose of using a cap rate in real estate?

The cap rate, or capitalization rate, is a key metric used in real estate to assess the potential return on investment for a property. It is calculated by taking the net operating income (NOI) of the property and dividing it by the current market value (or purchase price) of the property. This formula enables investors to analyze and compare the profitability of various real estate investments.

By utilizing the cap rate, potential investors can gauge their expected returns. A higher cap rate generally indicates a potentially higher return on the investment, which is crucial for making informed decisions about purchasing and managing properties. Therefore, its primary purpose is indeed to calculate the potential return on investment, helping investors decide whether a property meets their financial goals.

The other options focus on aspects related to insurance costs, property management fees, and pricing strategies, but they do not relate directly to the fundamental purpose of the cap rate, which is centered around the assessment of investment returns.