CAP Rate is the expected first year return. It is the net operating income divided by the price. It does not include debt services or income taxes. The higher the number, the higher the expected return. However, it does not mean it is a better return. Cap rates are increased to adjust for risk, condition of property, etc. Also, keep in mind that cap rate is just an entry level number. An investor should do a full discounted cash flow analysis and IRR over the holding period, accounting for risk tolerance, expected rate of return, and taxation.
Jun 14, 2013