What Is a Good Cap Rate?
You found a rental property listed at a 6% cap, a multifamily deal at 7.5%, and an older commercial building at 10%. The broker tells you they are all “great cap rates”.
But you know better: a “good” cap rate depends on property type, location, and risk – not just a single number.
Short answer: Lower cap rates (3–6%) usually mean safer, more expensive assets in strong markets. Higher cap rates (7–12%+) mean cheaper, riskier assets that may need work. A good cap rate is one that matches your risk tolerance, market, and strategy – not someone else’s rule of thumb.
This guide gives you realistic benchmark ranges so you can quickly judge whether a deal is roughly in the right ballpark, and where you still need to dig deeper.
Typical Cap Rate Ranges (Big Picture)
Before breaking it down by property type and market, here is a simplified way to think about cap rate levels in many U.S. markets:
3% – 5%: Prime assets in core markets, Class A, very stable but expensive.
5% – 7%: Solid, balanced returns in good locations; common for quality rentals and multifamily.
7% – 9%: Value-add or weaker markets; higher income but also higher risk.
9% – 12%+: Distressed, tertiary markets, or heavy value-add projects – can be great or terrible depending on execution.
These ranges are not hard rules. They shift over time with interest rates and market cycles, but they give you a starting point to interpret your own deals.
Benchmarks by Property Type & Market
| Property Type | Market | Typical “Good” Cap Range | Context |
|---|---|---|---|
| Class A multifamily | Core / primary | 3% – 5% | High-quality buildings in top locations; investors accept lower yields for stability. |
| B/C multifamily | Secondary markets | 5% – 7.5% | Common target for value-add investors seeking a balance of risk and return. |
| Single-family rentals | Suburban / stable | 5% – 7% | Often purchased by individual investors; moderate returns with manageable risk. |
Neighborhood retail / office | Secondary / tertiary | 7% – 9% | Shorter leases, tenant risk, and re-leasing risk demand higher cap rates. |
Older or heavy value-add assets | Most markets | 9% – 12%+ | High cap rates compensate for physical, leasing, or market risk; execution risk is real. |
Use these ranges as benchmarks, not promises. A 6% cap can be excellent for a stable single-family rental in a strong school district – and mediocre for a dated building in a weak rental market.
Whenever you see a deal, ask:
- What property type is this?
- Is this a core, secondary, or tertiary market?
- Is the plan core, value-add, or opportunistic?
Then compare your cap rate to the appropriate row in the table instead of using a single “one-size-fits-all” number.
What Makes a Cap Rate “Good”?
A cap rate is only “good” if it fits the risk, work, and outcome you are willing to accept. Four big drivers matter most:
1. Location & Market Strength
Prime coastal city with strong job growth? Investors accept lower cap rates because rents and values are more resilient. Small town losing population? You should demand a higher cap rate to compensate for weaker demand and liquidity.
2. Asset Quality & Age
Newer Class A buildings with modern systems, low maintenance, and strong amenities justify lower cap rates. Older buildings with dated systems and deferred maintenance should trade at higher caps – otherwise you’re not being paid for the extra work and risk.
3. Tenant Risk & Lease Structure
Long-term leases with strong tenants (credit retail, medical office, high-quality multifamily) support lower cap rates. Short-term leases, mom-and-pop tenants, or high turnover require higher caps because income is less certain.
4. Growth & Interest Rate Environment
In low-rate, high-growth environments, cap rates compress – investors pay more for the same income. When interest rates rise or growth slows, cap rates tend to move higher. A “good” cap rate in one cycle can be too low in another.
Examples: Reading Cap Rates in Real Deals
Example A – 5% Cap Core Apartment
Likely a “good” cap for institutional buyers seeking stability and long-term appreciation rather than maximum cash yield.
Example B – 7% Cap Value-Add Multifamily
For many value-add investors, this can be an attractive “good” cap: reasonable cash yield today with upside from renovations and rent growth.
Example C – 11% Cap Older Commercial
On paper this looks amazing, but you must check tenant quality, lease terms, local demand, and upcoming CapEx. High caps can be red flags if risk is mispriced.
How to Use These Benchmarks in Practice
1. Filter Deals Quickly
Use cap rate benchmarks as a first-pass filter. If a deal’s cap rate is far below typical ranges for its type and market, ask what justifies the premium price. If it’s far above, ask what risk the market is pricing in.
2. Combine with Calculators
Benchmarks are most powerful when combined with your numbers. Use the Cap Rate Calculator to compute the cap rate on your deal. Then compare it to the tables on this page to see if it looks low, typical, or high for that category.
3. Back Into a Target Price
If you have a target cap rate for your risk profile, you can work backwards from NOI to estimate a reasonable price. Our Property Value Calculator does this for you: enter NOI and your desired cap rate to see what you should roughly pay.
4. Align with Your Strategy
Core investors are comfortable with lower cap rates in exchange for stability. Value-add investors chase higher cap rates with more work and risk. Make sure the cap rate you call “good” matches your actual time, capital, and risk tolerance – not someone elses.
Limitations & Pitfalls When Chasing “Good” Cap Rates
Cap rate benchmarks are helpful, but they are still simplified. Chasing numbers without context is how investors get hurt.
Limitations of “Good” Cap Rate Rules
They rarely account for debt terms and interest-rate risk.
They assume NOI is accurate and sustainable – aggressive underwriting can make any cap rate look good on paper.
They do not capture future value-creation or downside scenarios.
They are averages – any specific deal can be better or worse than the range suggests.
Common Pitfalls to Avoid
Only chasing the highest cap rate: High cap properties often come with weak locations, problem tenants, or major repairs.
Using one benchmark for all markets: A “good” cap in a major coastal city is very different from a small rural town.
Ignoring NOI quality: One-time rent concessions, overestimated occupancy, or missing expenses can inflate NOI.
Confusing cap rate with total return: Cap rate is your unleveraged yield today. Your real return also depends on leverage, tax treatment, and exit cap rate.
Treat a “good” cap rate as a conversation starter – then dig into leases, expenses, tenant quality, and your financing plan before making any decision.
Related Tools & Guides
Cap Rate Calculator
Calculate cap rates, NOI, or property value with our free interactive tool.
Cap Rate Formula
See the full math behind cap rate with clear step-by-step examples.
FAQ
Frequently Asked Questions
Is 6% cap rate good?
In many markets, a 6% cap rate on a stable rental or multifamily property is considered a solid, balanced return. In prime core markets it might be unusually high (and worth scrutinizing), while in weaker markets it may be only average. Always compare 6% to typical ranges for your property type and location.
Is a higher cap rate always better?
No. Higher cap rates mean higher income relative to price, but usually also higher risk – weaker locations, older buildings, more volatile tenants, or heavier renovation needs. A 'better' cap rate is one that fairly compensates you for those risks and matches your strategy.
What is a good cap rate for rental property?
For many single-family rentals and small multifamily properties in stable U.S. markets, 'good' cap rates often fall in the 5%–7% range. In very strong locations, investors may accept lower caps; in weaker or more management-intensive areas, they may demand higher caps. Benchmarks are a starting point, not a rule.
What is a good cap rate for commercial real estate?
Commercial properties typically require higher cap rates than prime residential because leases, tenants, and demand can be more volatile. In many markets, 6%–8% can be reasonable for neighborhood retail or small office in decent locations, while riskier tertiary markets or older assets may trade at 8%–12% or more.
How do interest rates affect what is considered a good cap rate?
When interest rates rise, investors usually demand higher cap rates to maintain a spread over debt costs, so yesterday's 'good' cap may be too low today. When rates fall and capital is cheap, cap rates compress. Always judge cap rates in the context of current financing costs and alternative returns.