Multifamily Cap Rates: Apartment Buildings and Small Properties

The cap rate on multifamily is net operating income divided by the price, the same formula you would use on one rental house. What changes with an apartment building is the inputs. Expense ratios run higher, vacancy arrives one unit at a time instead of all at once, and at five units the lender and the appraiser both switch to a different rulebook. So the useful answer to what is a good cap rate for multifamily properties starts with the building, not with a benchmark.

What is a good cap rate for multifamily

There is no single number, and any source that hands you one is quoting a market it happens to know. A range is still useful, and there is a defensible way to build one.

Residential income property has historically traded at a cap rate roughly two to four points above the 10-year Treasury yield. If the 10-year sits near 4%, that points to fair cap rates of about 6% to 8%. Small apartment buildings usually belong at the wider end of that gap. Fewer buyers compete for them, the management is real work, and a five unit building in a small town can sit for months when you want out.

Markets break the rule in both directions.

• Supply constrained coastal metros often trade at 4% to 5.5%. Buyers there are paying for expected rent growth, not for current income.
• Midwest and southern secondary markets more often sit at 6.5% to 8.5%, with older stock and weaker submarkets above that.
• Tired buildings with deferred maintenance can show 9% or more on paper. That number usually includes repairs the seller never made.

Read a quoted cap rate as a question about risk. Why is this one higher than the building three streets over?

Where the expenses go

Start with the standard example used across this site, so the arithmetic is visible. A $500,000 house rents for $4,000 a month, or $48,000 a year. Allow 5% for vacancy and collected income is $45,600. Subtract $6,000 of property taxes, $2,500 of insurance and 18% of collected income, $8,208, for maintenance, reserves and management. NOI is $28,892, so the cap rate is 5.78%, a little above a 5.5% cap rate.

Those expenses total $16,708, about 37% of collected income. That ratio is the number worth arguing about on multifamily, because apartments rarely hold it. Four reasons it climbs:

• The owner often pays water, sewer, trash and common area electricity. Single family tenants usually pay their own.
• Units turn more often, and each turn costs paint, cleaning, a locksmith and lost rent.
• Professional management becomes standard past a few units, and the fee comes off collected rent with leasing fees on top.
• One roof, one parking lot, one boiler and shared hallways all wear out on the building’s schedule, not the tenant’s.

Run the same property as two units renting for $2,000 each. Price, taxes and insurance do not move, but the owner now pays water and trash and turns two leases instead of one, so budget 22% rather than 18%, which is $10,032. NOI falls to $27,068 and the cap rate to 5.41%. That is roughly $1,800 of income and four tenths of a point of cap rate, all of it in the expense line.

Operating expense ratios on small apartment buildings commonly land between 35% and 50% of collected income. Where a seller’s packet shows 25%, something is missing.

Vacancy behaves differently with more units

A single lease on a house is all or nothing. The tenant leaves, income goes to zero, and it stays there until someone signs. Spread the same rent across eight units and one empty unit costs you an eighth of the rent roll. The average vacancy may be no better, since more units means more turns, but the swings are much smaller. The NOI you underwrite ends up closer to the NOI you collect.

The sensitivity is easy to see. Push vacancy on the standard example from 5% to 8% and collected income is $44,160. Maintenance, reserves and management at 18% becomes $7,949. NOI is $27,711 and the cap rate 5.54%. Three points of vacancy costs about a quarter point of cap rate. On a stabilized building that is minor. During a lease-up it is not.

The five unit line

One to four units

These are financed as homes. Thirty year fixed loans, conforming programs, and an appraisal that leads with comparable sales and attaches a rent schedule. Owner occupants bid on duplexes too, and their offers set the comps your deal gets priced against. Here the cap rate is a score you give the property after the fact, not the thing that sets the price. That split is laid out in cap rates on commercial property compared with residential rentals.

Five units and up

At five units the building becomes commercial property in the lender’s eyes, and three things change at once. The appraiser leads with the income approach, so the cap rate sets the value instead of checking it. Loan terms shorten, often fixed for five to ten years with amortization over 25 or 30 and a balloon at the end. And the loan is sized off the building’s income rather than your pay stubs, usually to a debt service coverage ratio near 1.20 to 1.25, which frequently binds before the loan to value limit does.

That last point catches buyers. A building can appraise fine and still not support the loan you wanted, because the NOI will not cover the payment with the cushion the lender requires.

Above roughly twenty units, the buyer pool changes again. Funds, syndicators and listed trusts compete for those deals with cheaper debt, and cap rates compress accordingly. A twelve unit building usually trades richer than a sixty unit building in the same zip code. Add ground floor retail and you are in mixed-use development territory, with a different lender and a different required return.

Local rules that cap the income

Where rent control applies, in place rents can sit far below market and may never catch up. Underwrite the rent the leases actually produce, not the rent a market survey suggests, and expect buyers to price that gap with a higher cap rate or a lower offer. Licensing rules, inspection cycles and local fee schedules all land in the expense line as well.

Multifamily next to other property types

Northmarq’s 2026 midyear report put the national multifamily average at 5.75%. That sits near the low end of commercial real estate, alongside industrial and below retail, storage and office. The full comparison is in cap rates by property type.

Run your own numbers

Plug the rent roll, taxes, insurance and an expense ratio you believe into the Cap Rate Calculator on the home page. Try it twice, once with the seller’s expense number and once with yours at 40% or more, then compare the two cap rates. The difference between those answers is the part of the deal worth negotiating.