A cap rate is only an indication of the current. Keep in mind that while you are taking current income, expenses and future earnings into consideration, the formula doesn't account for changes in management, marketing and other factors. As the investment term progresses these can change the cap rate.
Contrarily, a low capitalization rates typically don't produce a lot of monthly cash flow. It will, however, appreciate over time.
You should keep in mind that assets with solid monthly cash flows are unlikely to appreciate over time. A high capitalization rate in the area will typically produce large cash flows monthly but won't appreciate over time.
The goal and investment criteria you have in mind are also important. Understanding your investment criteria will enable you to identify the deals that you are interested in and how to use the capitalization rates to find the right deal.
But, appreciation can be a possibility depending on market conditions. Rent and net operating earnings are likely to be more predictable than what the market will bring. Real estate is not all about the building's income.
Cap rate does not take appreciation into account. Multifamily properties can and do appreciate. This influences the factor that determines what makes multifamily properties attractive. You can see why the cap rate is so low in San Francisco. Even though the ROI may be low, the land's underlying value is high enough to allow for significant appreciation.
As you probably already know, cap rates only one aspect of a deal. Although they are essential and vital, they are only one part of a deal.
