What distinguishes rental yield from cap rate in real estate?

Rental yield and cap rate are both important metrics in real estate, but they serve different purposes in evaluating a property's financial performance.

Rental yield specifically measures the income generated by a property relative to its value or purchase price. It is typically calculated by taking the annual rental income and dividing it by the property's purchase price or current market value. This metric is useful for investors who want to understand the income potential of a property relative to its cost.

On the other hand, cap rate, or capitalization rate, represents the expected return on an investment property based on its net operating income (NOI) divided by its current market value. The cap rate indicates how much cash flow a property is expected to generate relative to its purchase price and can be used for comparing different real estate investments.

The distinction lies in their focus: rental yield concentrates on the income produced by the asset and how it measures against the property's price, whereas cap rate evaluates the profitability and return on investment through net operating income. Thus, stating that rental yield reflects the return of the asset and cap rate indicates property value accurately captures the essence of how each measure is utilized in analyzing real estate investments.