Is a 4% cap rate good?

A 4% cap rate is low. It is typical of expensive coastal markets where buyers pay for appreciation and location rather than income. The property yields less than a mortgage costs at current rates, so a financed buyer loses money on cash flow with a standard down payment.

On a $500,000 property, 4% is $20,000 of NOI, about $3,050 in monthly rent under typical expenses. A 30-year loan at 7.25% costs about 8.2% of the balance a year, more than double the yield, so leverage is strongly negative.

Four percent can still work for a cash buyer who expects strong rent growth; at 5% annual growth it becomes 5% on the original price in five years. It is not a good buy for anyone who needs the rent to carry the property. Each $1,000 of NOI is worth $25,000 at this cap rate.