A good cap rate typically falls between 4% and 10%, depending on the property type, location, and risk tolerance of the investor. As one of the most essential metrics in real estate investing, cap rates help you evaluate potential returns, compare properties, and understand the level of risk involved. Whether you’re looking at a single-family rental, an apartment complex, or a commercial building, knowing how to interpret cap rates is key to making smart investment decisions.
In this guide, we’ll break down what a cap rate is, how to calculate it, and how to determine whether a cap rate is “good” based on your goals, property type, and market.
To make things even easier, we’ve included a Cap Rate Calculator so you can quickly analyze your own deals.
If you still need help evaluating performance or boosting returns, consider working with a professional property management company that understands how to maximize income and control operating expenses.
What Is a Cap Rate?
A capitalization rate (cap rate) is a key metric used to estimate the potential return on a real estate investment. It shows how much income a property generates relative to its purchase price or market value, assuming the property is bought with cash (no mortgage or financing involved).
In simple terms, it answers the question: “What kind of annual return can I expect from this property based on its income?”
Cap Rate Formula
Cap Rate = (Net Operating Income ÷ Property Value) × 100
Where: Net Operating Income (NOI) = Gross Rental Income – Operating Expenses
Example
Let’s say a rental property earns $60,000 in annual NOI and has a market value of $900,000:
Cap Rate = ($60,000 ÷ $900,000) × 100 = 6.67%
This means the property generates a 6.67% annual return based on income alone, not including appreciation, tax benefits, or financing.
Cap Rate Calculator
Use the calculator to estimate a property’s capitalization rate based on key financial inputs. Just enter the gross rental income, operating expenses, and purchase price or market value. The calculator will automatically determine the net operating income (NOI) and use it to calculate the cap rate.
For a more precise estimate, you can also enter an occupancy rate—this is optional but helpful if the property isn’t fully leased or you’re modeling future income potential.
This tool is perfect for evaluating potential investments, comparing similar properties, or assessing your portfolio’s performance.
What Is Considered a Good Cap Rate?
While there’s no universal ‘ideal’ cap rate, market analysts often say it falls between five and ten percent. The exact number will depend on your investment strategy, risk tolerance, market conditions, and the type of property you’re evaluating.
That said, most cap rates fall between 4% and 10%:
4-6%: Lower-risk properties in stable markets or prime locations (e.g., major metro areas)
6-8%: Moderate-risk properties with decent upside potential
8-10%+: Higher-risk properties in less predictable or developing markets
In general, higher cap rates offer greater return potential but also more risk, while lower cap rates reflect safer, more stable assets-often with stronger appreciation potential over time.
Cap Rate Ranges by Property Type
Different types of real estate tend to yield different cap rates. Here’s a general breakdown:
| Property Type | Typical Cap Rate Range |
|---|---|
| Multifamily | 4% – 7% |
| Retail | 5% – 8% |
| Office | 6% – 9% |
| Industrial | 5% – 8% |
| Single-Family Rental | 4% – 6% |
These ranges can shift based on local market demand, economic conditions, and property-specific factors.
Key Factors That Influence Cap Rates
Understanding what drives cap rates helps you evaluate whether a given rate is high, low, or right in line with expectations.
1. Location: Properties in highly desirable areas often have lower cap rates because they are perceived as less risky and more stable. In contrast, properties in emerging or rural markets usually offer higher cap rates to compensate for greater uncertainty.
2. Property Condition: A well-maintained, turnkey property usually has a lower cap rate than one that needs extensive renovations or has maintenance issues.
3. Tenant Stability: Properties with long-term leases and creditworthy tenants may justify a lower cap rate, as they provide more predictable income.
4. Market Trends: Interest rates, local economic growth, population changes, and job markets all influence how much investors are willing to pay for a property-and thus affect cap rates.
5. Risk Tolerance: Investors willing to take on more risk (e.g., value-add projects or less developed areas) often target higher cap rates.
How to Use Cap Rates in Your Investment Strategy
Cap rates are most useful when comparing similar properties or evaluating how a new investment stacks up against your current portfolio. Here are a few practical ways to use cap rates:
1. Compare Properties Side by Side: If two properties have similar characteristics but vastly different cap rates, dig deeper. The higher-cap property may have hidden issues-or offer a better deal.
2. Identify Value-Add Opportunities: If you can increase the NOI through renovations, rent increases, improved tenant retention, or more efficient management, you can effectively “force” the cap rate upward and grow your property’s value.
3. Set Realistic Expectations: Use market cap rate averages to determine whether a deal is under- or overperforming, and ensure your projected returns align with your financial goals.
Cap Rate vs. Other Investment Metrics
Cap rate offers a quick snapshot of a property’s income potential, but it’s not the only metric you should rely on. To get a full picture of an investment’s performance, consider these additional metrics:
Return on Investment (ROI): Takes into account financing, tax implications, and property appreciation over time.
Cash-on-Cash Return: Measures the return on the actual cash you’ve invested, factoring in any loans or leverage used to acquire the property.
Internal Rate of Return (IRR): Reflects the total return on investment, including the time value of money and projected future cash flows.
Each of these metrics highlights a different aspect of your investment, and using them together gives you a more complete and accurate evaluation.
Limitations of Cap Rates
While cap rates are a valuable tool for evaluating potential returns, they do have limitations you should keep in mind:
Assumes a cash purchase: Cap rates are based on the idea that the property is bought outright, without financing. They don’t reflect the impact of mortgage interest or loan terms.
Ignores appreciation and tax benefits: Cap rates focus only on current income, not long-term value growth or tax advantages like depreciation on rental property and other deductions.
Less accurate for unstable income: Properties with inconsistent rental income or fluctuating expenses can distort the cap rate and lead to misleading conclusions.
Bottom line: Cap rate is a helpful starting point, but it shouldn’t be the sole factor in your investment decision. Use it alongside other metrics for a more complete analysis.
Final Thoughts: How to Know if a Cap Rate Is “Good”
A good cap rate is one that aligns with your risk tolerance, investment goals, and the current market. Lower cap rates tend to reflect safer, long-term investments, while higher cap rates may offer more immediate income with added risk.
By understanding how cap rates work-and how to apply them-you can evaluate properties more confidently, spot red flags, and build a more profitable real estate portfolio.
If you’re ready to evaluate new deals, improve property performance, or explore professional property management, contact us today. We help investors nationwide make smarter real estate decisions and boost returns with data-backed strategies.
FAQs About What Is a Good Cap Rate
What is a good cap rate?
A “good” cap rate depends on your investment goals, risk tolerance, and the property’s location and type. In general, most cap rates fall between 4% and 10%. Lower cap rates (4–6%) typically indicate lower-risk, stable investments, while higher cap rates (8–10%+) suggest higher-risk opportunities with potentially greater returns.
What is a good cap rate for rental property?
For residential rental properties—like single-family homes or small multifamily units—a good cap rate typically ranges from 4% to 6% in major metro areas and 6% to 8% in secondary or developing markets. The “right” cap rate should align with your target cash flow and risk appetite.
What is a good cap rate for commercial real estate?
In commercial real estate, good cap rates vary by asset class and market. Office buildings and retail spaces often fall in the 6% to 9% range, while industrial properties may offer slightly lower cap rates due to higher demand and stability. High-demand urban areas usually yield lower cap rates than suburban or tertiary markets.
What is a good cap rate for multifamily?
Multifamily properties typically have cap rates between 4% and 7%. In hot urban markets, cap rates tend to be lower (around 4% to 5%), while in emerging markets, they may be closer to 6% or 7%. Investors often accept lower cap rates for multifamily assets due to consistent demand and long-term growth potential.
Is a 5 cap rate good?
Yes, a 5% cap rate can be good, especially in a strong market with stable cash flow and low vacancy risk. Lower cap rates usually reflect lower risk and greater appreciation potential. However, it may not offer high cash flow compared to riskier properties with higher cap rates.
Is a 7 cap rate good?
A 7% cap rate is often considered solid, particularly in markets that are not top-tier metros. It can strike a good balance between cash flow and manageable risk. For value-add investors or those seeking stronger income returns, a 7 cap can be very attractive.
Is a 10 cap rate good?
A 10% cap rate is high, and while it can signal strong cash flow, it usually comes with increased risk—such as property condition issues, high vacancy, or less desirable locations. It may be suitable for experienced investors looking for turnaround opportunities or strong income in exchange for more hands-on involvement.
