Simply: the cap rate is always expressed as a percentage of what you net (NetOperatingIncome=made/make) on the property divided by the price (what you paid/pay for the property).
You net $36,000 year; you paid $900,000: your cap rate is 4%
(Which is excellent, by the way - in this market anything under 12% is good! Even in a boom market, 6% - 8% is really healthy!)
Your eval needs to look at rents, additional revenue, expenses including taxes/insurance, what MAY BE a major expense, i.e. roof, plumbing, structural, and of course, depreciation.
Obviously, the location, type of property, leases, capitalization etc., play heavily in modifying the cap rate based on time, building health and investor risk tolerance.
Dec 1, 2008