Is a 6% cap rate good?

A 6% cap rate is moderate to solid, and about average for a rental in a mid-sized US market. It means net operating income is 6% of price before the mortgage. On a $500,000 property that is $30,000 of NOI, roughly $4,120 in monthly rent under typical expenses.

Whether 6% is good depends on the market. In a coastal metro where comparable properties trade at 4.5%, a 6% cap rate is a bargain or has a problem. In a Midwest market where 8% is normal, it is expensive.

At current rates, 6% does not quite carry a 75% loan. A 30-year loan at 7.25% costs about 8.2% of the balance each year, so a 6% property has thin or negative cash flow at 25% down. Every $1,000 of NOI is worth about $16,667 at this cap rate.

A six cap is shorthand for a 6% cap rate. It means net operating income equals 6% of the purchase price each year, before the mortgage. Investors say it the same way for any number, so a six cap and a 6% cap rate are the same thing.

On a $500,000 property a six cap is $30,000 of NOI, roughly $4,120 in monthly rent under typical expenses. At a six cap, every $1,000 of annual NOI is worth about $16,667 of value.