What is a Good Cap Rate? — 2026
Last Updated: 2026-02-01
A 'good' cap rate typically falls between **4% and 10%**. However, the ideal rate depends on your strategy: **4-6%** is standard for stable, low-risk assets in prime markets (Class A), while **8-10%+** is targeted for value-add opportunities in emerging areas where higher risk is compensated by greater cash flow potential.
The Risk-Reward Spectrum
Understanding where your investment falls on the spectrum is crucial for long-term portfolio stability.
Core / Stable
4-6% yields. High-quality tenants, prime locations, and modern construction. Focus is on capital preservation and long-term appreciation.
Value-Add
6-8% yields. Properties requiring minor renovations or management improvements. Balances steady income with moderate growth potential.
Opportunistic
8%+ yields. Significant vacancy or structural issues. High risk, but offers the greatest potential for forced appreciation.
2026 Asset Class Benchmarks
Market yields vary significantly by property type. Use these national averages to calibrate your expectations.
| Asset Class | Primary Market (4-6%) | Secondary Market (6-8%) | Emerging Market (8%+) |
|---|---|---|---|
| Multifamily | 4.5% - 5.5% | 5.5% - 7.0% | 7.5% - 9.0% |
| Industrial | 5.0% - 6.0% | 6.0% - 7.5% | 8.0% - 10.0% |
| Retail (NNN) | 5.5% - 6.5% | 6.5% - 8.0% | 8.5% - 11.0% |
| Office | 6.5% - 8.0% | 8.0% - 10.0% | 10.0% - 13.0% |
What Drives 'Good' Rates in 2026?
In the current 2026 economic climate, interest rate spreads remain the primary driver of what professional investors consider 'good'. A cap rate must offer a sufficient premium (the 'spread') over the risk-free rate, typically the 10-Year Treasury yield. Key drivers for 2026 include: - Yield Spread Strategy: Institutional investors currently target a spread of 250-350 basis points over government bonds. If the Treasury yield is 4.5%, a 'good' cap rate for a stable asset starts at 7.0%. - Rent Growth Projections: In high-growth markets like Austin or Phoenix, investors often accept a lower 'Entry Cap Rate' (e.g., 4.5%) because they anticipate double-digit rent growth that will drive the 'Yield on Cost' to 7%+ within 24 months. - Capital Stack Costs: With debt costs remaining elevated, the 'Positive Leverage' threshold is higher. A cap rate is only 'good' if it exceeds your mortgage interest rate; otherwise, you face 'Negative Leverage' where the bank makes more than the owner.
Identifying the Right Deal
Don't just chase the highest number—a high cap rate without context is often a 'yield trap'. To determine if a rate is truly 'good', use this professional underwriting checklist: 1. Verify the NOI: Is the Net Operating Income based on actual 'Trailing 12' (T12) data, or just a broker's optimistic 'Pro Forma'? A 'good' 8% cap rate can quickly become 5% if expenses were underestimated. 2. Analyze the Submarket: A 6% cap rate is excellent in Manhattan but potentially poor in a rural town with declining population. Always compare against local submarket averages. 3. Assess the Exit Cap: Real estate is a long game. If you buy at a 5% cap rate today, what will you sell at in 5 years? If market rates expand to 6%, your property value could drop even if your income grows. Professional investors focus on Risk-Adjusted Returns. A 'good' cap rate is one that compensates you adequately for the specific risks of the property type, tenant quality, and location.
2026 Market Outlook: The 'New Normal'
As we move through 2026, the real estate market has entered a 'New Normal' phase characterized by stabilized but higher interest rates. Investors who previously chased 4% cap rates in 2021 are now recalibrating for a 6-7% environment. We anticipate: - Sector Divergence: Industrial and Data Centers will continue to command premium pricing (lower cap rates) due to critical infrastructure needs. - Secondary Market Strength: 'Sun Belt' cities are seeing cap rate stabilization as migration patterns solidify, making 6.5% yields in these areas highly attractive for long-term hold strategies. - Sustainability Premium: Properties with high ESG ratings are trading at a 25-50 basis point premium as institutional funds prioritize green energy efficiency.
Expert Selection Criteria
How to determine if a high cap rate is a 'good deal' or a 'danger signal'.
**The Yield Trap**: High cap rates (12%+) often signal 'Class C' or 'Class D' properties with high turnover, massive deferred maintenance, or declining neighborhoods. Your net profit after repairs may be lower than a 5% Class A asset.
**Hyper-Local Benchmarking**: Cap rates are hyper-local. A 'good' rate for a medical office in a hospital district is significantly lower than a general office building in a suburban park.
**Spread Compression**: Monitor the 10-Year Treasury. When the spread between cap rates and bond yields narrows too much, real estate becomes less attractive relative to safer assets.