Here's a little bit more info about cap rates, too...
To get the project rate of return, you need to add the property appreciation rate to the cap rate. E.g., if the cap rate is 5% and the appreciation rate is 3%, your project rate of return is 8%. This is equivalent then to adding the dividend component of a return and the growth in share price component of a return together to get your return on investment in a mutual fund or stock, etc..
Also, if you use leverage (borrowed money) you can compare the overall project rate of return to your borrowing rate to see if you're getting positive financial leverage and thereby amplifying your returns. E.g., if your overall project rate of return is 8% and you borrow money at 4%, you're getting massive positive financial leverage.
One can also use this little relationships to see what went wrong with real estate during the recent meltdown. People bought properties assuming 3% cap rates and say 5% appreciation rates so overall 8% project rate of return--perhaps all funded with money costing 6% or whatever. So good financial leverage there though tellingly very dependent on the appreciation rate to make everything work out in the end...And then it turns out that the appreciation rate was really minus 10% or whatever... and this meant in reality you're borrowing money at 6% to invest in somethingn that's "earning" minus 7%. Brutal. Yikes.
It's an older web site that talked in terms of how the cap rate and project rate of return math works for shortsale properties, but there are longer discussions about these calculations at http://www.howdoibuyashortsale.com/over ... return.htm
as well as some free spreadsheets you can use.
Just for the record, I think the shortsale opportunity seems to be "gone" now... (I did three short sale properties and got great deals, but I think the discounts at least where I was shopping have now gone away.)