Is a 3% cap rate bad?

For income, yes. A 3% cap rate means net operating income is 3% of price, less than half what a mortgage costs at current rates and below what a savings account pays. It is not bad for a buyer who wants appreciation in a premium market and can carry negative cash flow.

On a $500,000 property, 3% is $15,000 of NOI, about $2,510 in monthly rent under typical expenses. A 30-year loan at 7.25% costs about 8.2% of the balance a year, so a financed buyer loses about five cents on every borrowed dollar.

Cap rates this low appear in coastal California, New York, Seattle and similar markets, where land value and expected appreciation drive prices. At 3%, each $1,000 of NOI is worth about $33,333, so values are very sensitive to rent and to rising cap rates. A one-point rise to 4% cuts value by 25%.