Is a 5% cap rate good?

In a major metro, it is normal. In a low-cost market it is expensive. A 5% cap rate means the property yields less than a 30-year loan costs at today's rates, so a financed buyer will have negative cash flow with a standard down payment. It is a price for stability and appreciation, not for income.

Is an 8% cap rate good?

For most markets, yes. An 8% cap rate produces enough income to carry a loan with 20 to 25% down and still cash flow. It is common in low-cost Midwest and Southern markets and in small multifamily. Check whether the expenses behind it include vacancy, reserves and management.

Is a 10% cap rate realistic?

It exists, in very cheap markets and on distressed or C-class property. More often, a 10% cap rate on a listing means the NOI was computed without management, reserves or realistic vacancy. Recompute it with full expenses before believing it.

What is a good cap rate for a single-family rental?

Single-family rentals in decent neighborhoods typically trade at 4 to 6% in large metros and 6 to 8% in secondary markets. They run a point or so below small multifamily in the same area because buyers pay for lower turnover and easier resale.

What Is a Good Cap Rate | Benchmarks by Market and Property Type

A good cap rate is one at or above what comparable properties in the same market and condition have recently sold for. There is no single good number, because a 5% cap rate is a fair price in Seattle and a bad one in Cleveland.

Nationally, most residential rentals trade between 4% and 8%. Where a property should land inside that range depends on its market, its type, its condition and its tenants.

Cap rate bands and what they signal

Under 4%. Premium coastal markets: much of coastal California, New York City, Boston, Seattle, parts of Denver and Austin at their peaks. Buyers here are paying for appreciation, land value and tenant quality. Income barely matters to the price, and a financed buyer will not cash flow.

4 to 6%. Most large metros and their suburbs. Newer single-family rentals, good school districts, stable tenants. Income is real but thin relative to price. At current interest rates a property here needs a large down payment to break even on cash flow.

6 to 8%. Mid-priced and secondary markets, small multifamily in growing cities, older but solid housing stock. This is the range where a rental carries a 75% loan and still produces cash flow, which is why investors focused on income cluster here.

8 to 10%. Low-cost Midwest and Southern markets, older stock, C-class neighborhoods, small multifamily with higher turnover. The income is high relative to price because buyers demand it for the risk: more repairs, more vacancy, less appreciation.

Over 10%. Very cheap markets, distressed property, or an NOI that leaves things out. Treat any listing above 10% as a prompt to recompute the expenses.

Each band has a page with worked numbers: see 6% cap rate or 8% cap rate.

Why cap rates differ by market

A cap rate is the return buyers demand for holding a property’s income stream. It moves with two things.

Risk. Where tenants are less stable, buildings are older and vacancy runs higher, buyers want more income per dollar of price. Cap rates rise.

Growth. Where rents and values are expected to climb, buyers accept less income today because they expect more tomorrow. Cap rates fall. A 4% cap rate with 5% annual rent growth can outperform an 8% cap rate with no growth over a decade, and the market prices that in.

Interest rates push on both. When borrowing costs rise, buyers need more income to cover the debt and cap rates drift up. The cap rate and interest rates guide covers how far and how fast.

Why cap rates differ by property type

Within one market, cap rates step up with management intensity and step down with resale ease.

Single-family homes trade lowest, often a point below small multifamily in the same area. They attract owner-occupant buyers on resale, turn over less, and are simpler to run.

Two to four unit properties trade a half point to a point higher. More income per dollar, more tenants to manage.

Condos vary. Low HOA dues and strong associations trade like single-family. High dues push cap rates up because the dues eat NOI and buyers discount for the lack of control.

Older properties and rougher neighborhoods trade higher still. Short-term rentals are priced by a different buyer pool and often do not trade on cap rate at all.

Why the cap rate can exceed your loan’s cost, and why it matters

A 30-year loan at 7.25% costs about 8.2% of the balance each year in payments, once principal is included. A property with a cap rate below that loses money on every borrowed dollar. A property above it makes money on every borrowed dollar.

That threshold is why 6 to 8% is the range income investors live in, and why sub-5% markets are appreciation plays. It also means that a “good” cap rate for a financed buyer moved up two points between 2021 and 2024 as rates rose, even though the properties did not change. The cap rate vs cash on cash return guide works through the mechanics.

A good cap rate versus an inflated one

Before comparing a listing’s cap rate to any benchmark, rebuild the NOI. The cap rate formula guide lists the standard allowances. The lines most often missing from a seller’s number:

Vacancy, usually 5%. Worth about 0.4 points of cap rate on a typical single-family rental.
Management, 8 to 10%. Worth about 0.8 points.
Capital reserves, 5%. Worth about 0.5 points.
Reassessed property taxes. Worth anywhere from nothing to 1.5 points depending on the state and how long the seller owned it.

A listing at 8.3% with those four lines missing is a property at 6.1%. That is the difference between a good cap rate and a normal one.

How to set your own number

Pull recent sales of similar property in the submarket and compute their cap rates on honest expenses. That is the market cap rate. A property offered above it is a bargain or a problem, and it is worth finding out which. A property offered below it is priced for something the income does not show, usually growth or condition, and you should be able to name what that is.

Then decide what you need. If you want the property to carry itself with 25% down at today’s rates, you need a cap rate above the loan’s annual cost, roughly 8% at 7.25%. If you are buying for appreciation and can carry negative cash flow, a lower cap rate may be fine.

The calculator shows the cap rate on your numbers, what the NOI is worth at the market cap rate, and the rent it would take to justify the asking price.

What Is a Good Cap Rate for Rental Property? Benchmarks by Market and Type