Capitalization is a fancy word for the process of converting some future benefit to a present value. The benefit takes place in the future and is usually some kind of promise or expectation. Therefore, it requires time and some element of risk to get it. A cap rate is a way of converting the anticipated first year income into the present value of the real estate. You can develop cap rates by analyzing income and selling prices from the sale of comparable properties.
Cap rates are also more sensitive to vacancy rates and operating expenses.
To estimate the value of the real estate, divide NOI by the cap rate. The main problem with using cap rates is the lack of good real estate information. In some cases, buyers and sellers may want to keep this information confidential. In other cases, real estate agents may not want to take the trouble to extract a cap rate for their listing sheets, they may do it incorrectly, or they may simply not know how. However, sooner or later, informed buyers and serious lenders are going to ask about cap rates.