What does a 7.5% cap rate mean?

A 7.5% cap rate means the property's net operating income is 7.5% of its price each year before any mortgage. On a $500,000 property that is $37,500 of NOI, which takes about $4,920 in monthly rent under typical expenses. It is a solid yield for a residential rental.

At 7.5%, every $1,000 of annual NOI is worth about $13,333 of value. Compared with the 4 to 6% typical of large metros, 7.5% signals a mid-priced or secondary market, small multifamily, or older stock.

It is also close to the line where financing helps. A 30-year loan at 7.25% costs about 8.2% of the balance each year in payments, so a 7.5% cap rate still loses a little on borrowed money at that rate. At a 6.5% mortgage rate leverage turns roughly neutral, and cash flow with 25% down becomes realistic.