What is a reasonable cap rate for a rental property?

A reasonable cap rate is one at or above what comparable rentals in the same market have recently sold for. Nationally, most residential rentals trade between 4% and 8%. For a financed buyer who wants the rent to cover the loan at today's rates, reasonable starts around 7%.

Expensive metros run 4 to 5%, most large cities 5 to 6%, mid-priced markets 6 to 8%, and low-cost markets 8 to 10%. Within a market, single-family homes trade about a point below small multifamily.

Two tests make a cap rate reasonable for you. It should match or beat recent local sales computed on honest expenses, and if you are financing, it should be close to or above your loan's annual cost, roughly 8.2% for a 30-year loan at 7.25%. A cap rate below that is reasonable only if you are buying appreciation and can carry negative cash flow.