What is a good cap rate?
There is no single good cap rate. A cap rate is good when it matches or beats what similar properties nearby sell at, and pays enough more than a safe investment to be worth the risk and the work. A higher number is not automatically better: it usually means more risk.
What a cap rate measures
The capitalization rate is the yearly income a property produces, as a percentage of its price, as if you had paid all cash.
Cap rate = Net operating income ÷ Price
Net operating income, or NOI, is a year of collected rent less the costs of running the property. The mortgage is left out, which is what lets you compare two properties whatever the buyers borrow.
- A duplex is listed at $300,000 and rents for $2,400 a month in total: $28,800 a year.
- Allowing 5% for vacancy leaves $27,360. Operating expenses are $9,000 a year, so NOI is $18,360.
- $18,360 ÷ $300,000 = 6.12% cap rate.
Open this example in the cap rate calculator and change any figure to see the result move.
Why there is no single good number
A cap rate is a price as much as a return. Buyers pay more for each dollar of income when they see the income as safe and likely to grow, and that pushes the cap rate down. They pay less when they see risk, and that pushes it up.
- Location: sought-after neighborhoods in large cities often sell at low cap rates. Smaller or slower markets usually sell at higher ones.
- The building: newer properties in good repair tend to sell at lower cap rates than older ones that need work.
- The tenants: long leases and reliable tenants lower the risk. Frequent turnover raises it.
- Interest rates: when borrowing costs and the returns on safe investments rise, buyers commonly want higher cap rates too, though prices can take time to adjust.
So the same 6% can be generous in one market and thin in another. That is why the useful question is not “is 6% good?” but “is 6% good for this kind of property, here, now?”
How to read the number
The cap rate calculator on this site describes results in four broad bands. They are a way to read the number, not a standard to pass.
| Cap rate | How it is commonly read |
|---|---|
| Under 4% | Low yield, common in expensive, high-demand markets |
| 4% to 7% | Mid-range yield, typical of many established markets |
| 7% to 10% | Higher yield, usually with more risk or more work |
| Over 10% | Very high yield. Check the rent and expense figures |
We have not found an official source that publishes cap rates for small rental properties, so no market averages are quoted here. Surveys from brokerages mostly cover large commercial buildings, and their figures should not be read across to a house or a duplex. The reliable evidence is local: what similar properties near yours actually sold for, and what they earn.
Three comparisons that tell you whether yours is good
1. Similar properties nearby. Work out the cap rate of recent sales of the same kind of property in the same area, using the same vacancy and expense assumptions for each. If they sell at about 6% and yours shows 6.12%, the price is in line. This is the comparison that matters most.
2. A safe return. Many investors compare the cap rate with the yield on 10-year US Treasury notes, which the Treasury publishes every business day. A rental brings vacancies, repairs and work that a Treasury note does not, so the cap rate needs to be higher by enough to make that worthwhile to you. How much is enough is a personal judgment.
3. The cost of your loan. Cap rate ignores financing, but your return does not. If a year of loan payments is a larger share of the loan than the cap rate, borrowing lowers your return instead of raising it.
- The duplex produces $18,360 of NOI: a 6.12% return for a buyer who pays all cash.
- A buyer who borrows $225,000 at 7% over 30 years pays $17,963 a year, which is 7.98% of the amount borrowed. That is more than the 6.12% the property earns.
- $18,360 − $17,963 leaves $397 a year. On the $75,000 put down, that is a 0.53% cash-on-cash return, far below the cap rate.
With a 5% loan the payments fall to $14,494 a year and the same buyer keeps $3,866, a 5.15% return. Use the cash-on-cash return calculator to see what your own financing does to a deal.
The same income at different prices
Because cap rate is income divided by price, the price you negotiate changes it directly. Here is the duplex’s $18,360 of NOI at four prices.
| Price | Cap rate |
|---|---|
| $250,000 | 7.34% |
| $300,000 | 6.12% |
| $350,000 | 5.25% |
| $400,000 | 4.59% |
The sum also runs the other way. Dividing NOI by the cap rate that similar properties sell at gives a rough value: $18,360 ÷ 6% = $306,000.
When a high cap rate is a warning
A cap rate well above similar properties is more often an error in the figures than a bargain. The usual causes:
- Understated expenses. If the listing for the duplex showed $6,000 of expenses instead of $9,000, the cap rate would read 7.12% instead of 6.12%.
- Rent the property does not yet earn. Listings sometimes use the rent a unit could fetch after work, not what tenants pay now.
- No vacancy allowance. Every rental is empty some of the time.
- Missing management. If you plan to manage it yourself, the work still has a cost, and a later buyer or lender will count it.
- Repairs that are due. A low price can reflect a roof or a heating system near the end of its life.
Rebuild the figure from documents where you can: the leases, the tax bill, the insurance quote and a year of repair invoices.
What cap rate leaves out
- Your loan. Use cash-on-cash return for the return on your own cash, and DSCR for whether the rent covers the payments.
- Growth. Cap rate is one year of income. It says nothing about rents or prices rising or falling.
- Large one-off costs. A new roof is not an operating expense, so it does not appear in NOI.
- Income tax, including depreciation, which lowers the tax on rental income.
Treat cap rate as a first filter for comparing properties, then run the full figures in the rental property calculator. The results are estimates, not advice.
Common questions
Is a 5% cap rate good?
It depends on the market and the property. In an expensive, high-demand area 5% can be in line with similar properties. In a market where comparable rentals sell at 8%, a 5% cap rate means the price is high for the income. Compare it with nearby sales and with the cost of your loan.
Is a 10% cap rate good?
It is a high yield, and high yields usually come with more risk or more work: weaker locations, older buildings or less reliable rent. First check that the rent is what tenants actually pay and that the expenses are complete. Understated expenses are a common reason a cap rate looks high.
Is a higher cap rate always better?
No. A higher cap rate means more income for each dollar of price, but the market usually offers it because the income is less certain. A lower cap rate usually comes with a safer or faster-growing location.
What is the difference between cap rate and cash-on-cash return?
Cap rate is the property’s return as if bought with cash: net operating income divided by price. Cash-on-cash return is your own return: cash flow after loan payments divided by the cash you put in. With a loan the two can differ widely.
Do cap rates change when interest rates change?
They tend to move in the same direction over time, because buyers compare property with other investments and with the cost of borrowing. The link is loose, and prices can take a long time to adjust.
Does cap rate include the mortgage?
No. It is based on net operating income, which leaves out loan payments. That is why two buyers with different loans get the same cap rate on the same property.