While cap rate is a good starting point, I like to also take a long-term view and consider potential appreciation of a property. Cap rate takes into account the return on YOUR money invested while appreciation on a leveraged investment (you’re probably only putting 25–30% down so you’re using 75–70% of a lender’s money) over decades can greatly multiply your return by a factor of about 4x.
Obviously, potential appreciation is not something that shows up on the books or is guaranteed but it is real. Just look at any long-term chart of property values in the U.S. and the trend has been historically upward.
I’m okay with an average cap rate but when I’ve sold properties 20–25 years later I’ve never been disppointed with the overall net profit on my investment.