What Is a Good Cap Rate?

Cap rate in one sentence

Cap rate is a property's net operating income divided by its price. If a building nets $60,000 a year after vacancy and operating expenses and sells for $1,000,000, it trades at a 6% cap rate. You can run any listing through the cap rate calculator to get the number from a rent roll.

Why there is no universal good cap rate

Cap rates are prices. A low cap rate means buyers are paying a lot for each dollar of income, usually because they think that income is safe and likely to grow. A high cap rate means buyers want more income up front to make up for risk, effort or weak growth. So the question is not whether 6% is good in general, but whether 6% is a fair price for this particular income stream.

Four things drive most of the difference between cap rates:

• Location. Large, growing metros with strong job markets tend to have lower cap rates than small towns or shrinking cities.
• Building quality. Newer buildings with modern systems trade at lower cap rates than older buildings that need capital work.
• Tenant quality and stability. Steady, long-term tenants and low turnover justify a lower cap rate.
• Interest rates. When borrowing costs rise, buyers need more income to make deals work, and cap rates tend to drift up over time.

Compare to the right benchmarks

The most useful benchmark is recent sales of similar buildings in the same submarket. Brokers, appraisers and local investor groups can usually give you a range. If comparable fourplexes in a neighborhood have sold at 6.5% to 7.5%, a listing at 5% is expensive and one at 9% deserves a hard look at why.

The second benchmark is your cost of debt. If the cap rate is lower than your mortgage interest rate, borrowing will reduce your return rather than increase it. Investors call that negative leverage. A deal can still make sense with negative leverage if you expect strong rent growth or plan to add value, but you are betting on the future rather than being paid today. Run the numbers with your actual loan in the cash-on-cash return calculator to see the effect.

When a high cap rate is a warning sign

A cap rate well above the local range is not automatically a bargain. Before you get excited, check these common causes:

• The NOI leaves out expenses, often management, repairs or a replacement reserve.
• Property taxes are based on the seller's old assessment and will rise after the sale.
• The rent roll includes tenants who are behind on rent or about to leave.
• The building needs a roof, boiler, sewer line or other big-ticket work that the price reflects but the NOI does not.
• The neighborhood has falling demand, high crime or a major employer leaving.

Rebuild the NOI yourself from the trailing twelve months of income and expenses. Our guide to calculating NOI lists what to include.

When a low cap rate can still be a good buy

Investors happily buy at low cap rates when they expect the income to grow. Below-market rents that can be raised at lease renewal, vacant units that can be filled, or expenses that a better manager can cut all mean the cap rate on your future NOI will be higher than the going-in number. Underwrite that improvement carefully, assume it takes longer and costs more than you hope, and check that the property can still cover its mortgage in the meantime with the DSCR calculator.

A practical way to decide

Start with the going-in cap rate on an NOI you rebuilt yourself. Compare it to recent sales of similar buildings and to your borrowing cost. Then look at your cash-on-cash return with real financing and at the DSCR the lender will see. If all three look reasonable, and the property is in a location you understand, the cap rate is probably good for you, whatever the number is.

Calculators for this guide

Results are estimates for education only, not financial, tax or legal advice. Check numbers with your lender and advisors before you buy. Last reviewed 2026-10-12.