What is a Good Cap Rate? Ranges by Market and Property Type
Cap rate benchmarks vary by market, property type, and interest rate environment. See typical ranges for SFR, multifamily, STR, and commercial properties across gateway, secondary, and tertiary markets.
“What is a good cap rate?” is one of the most common questions in real estate investing — and the honest answer is: it depends entirely on context. A 4% cap rate in Manhattan might be excellent. A 4% cap rate in rural Ohio is terrible. Cap rate is a relative metric, and evaluating it requires understanding the specific market, property type, risk profile, and prevailing interest rates.
This guide provides concrete cap rate ranges across markets and property types so you can benchmark deals accurately. If you need a refresher on the formula itself, read What is Cap Rate? first.
Quick Recap: The Cap Rate Formula
Cap Rate = Net Operating Income (NOI) / Property Value x 100
NOI is gross rental income minus operating expenses (taxes, insurance, management, maintenance, vacancy). It excludes mortgage payments. For a full breakdown of how to calculate NOI, see our guide to Net Operating Income.
Use our cap rate calculator to run the numbers on any deal.
Cap Rate Ranges by Market Tier
Real estate markets are commonly grouped into three tiers based on population, economic diversity, and institutional demand. Cap rates move inversely with demand — the more investors want to own property in a market, the lower the cap rate.
Gateway / Primary Markets (3.0% - 5.5%)
These are the largest, most liquid markets with the deepest tenant pools and strongest long-term appreciation. Examples: New York City, San Francisco, Los Angeles, Boston, Seattle, Miami, Washington D.C., Chicago.
| Property Type | Typical Cap Rate Range |
|---|---|
| Class A Multifamily | 3.0% - 4.5% |
| Class B Multifamily | 4.0% - 5.5% |
| Single-Family Rental | 3.5% - 5.0% |
| Short-Term Rental | 4.0% - 6.0% |
Investors accept lower cap rates here because they are buying appreciation potential, liquidity (easy to sell), and lower vacancy risk. A 4% cap rate in San Francisco with 5-7% annual appreciation can produce strong total returns over a 10-year hold.
Secondary Markets (5.0% - 7.5%)
Mid-sized metros with growing populations and diversifying economies. Examples: Nashville, Austin, Raleigh, Tampa, Phoenix, Denver, Charlotte, Salt Lake City, Boise.
| Property Type | Typical Cap Rate Range |
|---|---|
| Class A Multifamily | 4.5% - 5.5% |
| Class B Multifamily | 5.5% - 7.0% |
| Single-Family Rental | 5.0% - 7.0% |
| Short-Term Rental | 6.0% - 8.0% |
Secondary markets offer a balance between cash flow and appreciation. Many institutional investors have moved into these markets over the past decade, compressing cap rates from their historical 7-9% range.
Tertiary Markets (7.0% - 10.0%+)
Smaller cities and towns with concentrated economies, often dependent on a single employer or industry. Examples: smaller Midwest and Southeast cities, college towns, rural tourism areas.
| Property Type | Typical Cap Rate Range |
|---|---|
| Class B Multifamily | 7.0% - 9.0% |
| Class C Multifamily | 8.0% - 10.0%+ |
| Single-Family Rental | 7.0% - 10.0% |
| Short-Term Rental | 8.0% - 12.0% |
Higher cap rates reflect higher risk: less tenant demand, harder to sell, more exposure to economic downturns. But for cash flow investors who can manage properties effectively, tertiary markets can produce excellent monthly income.
Cap Rate Ranges by Property Type
Single-Family Rentals (SFR): 4.5% - 9.0%
SFR cap rates vary widely because the properties are heterogeneous — every house is different. Key factors include location, age, condition, school district, and local rent-to-price ratio. Institutional SFR operators (Invitation Homes, American Homes 4 Rent) typically target 5-6% cap rates in growth markets.
Small Multifamily (2-4 units): 5.0% - 8.5%
Duplexes, triplexes, and fourplexes often trade at slightly higher cap rates than comparable SFR because the tenant pool is more price-sensitive and management is more intensive. The upside is that per-unit acquisition costs are lower and vacancy risk is diversified across multiple units.
Large Multifamily (5+ units): 4.0% - 8.0%
Institutional-grade apartments (Class A in primary markets) trade at the lowest cap rates in real estate. Class C value-add apartments in secondary markets can trade at 7-8% cap rates, representing significant upside if you can execute a renovation and increase rents.
Short-Term Rentals: 5.0% - 12.0%
STR cap rates are higher because the income stream is less predictable — subject to seasonality, regulatory risk, and platform dependency. A beach house generating $60,000/year in gross revenue with $25,000 in expenses and a $500,000 value has a 7% cap rate. Use our Airbnb calculator to model STR-specific scenarios.
Commercial (Retail/Office/Industrial): 5.0% - 10.0%
Commercial cap rates depend heavily on tenant credit quality, lease term, and building functionality. A single-tenant NNN property leased to a credit tenant (Walgreens, Dollar General) might trade at 5-6%. A multi-tenant strip center with short-term leases might trade at 8-10%.
The Cap Rate vs. Interest Rate Spread
One of the most important frameworks for evaluating cap rates is the spread between cap rate and the prevailing cost of debt.
Cap Rate Spread = Cap Rate - Mortgage Interest Rate
Historically, this spread has averaged 150-250 basis points (1.5% - 2.5%). When the spread is positive, the property’s unlevered yield exceeds the cost of borrowing, meaning leverage amplifies returns. When the spread is negative — as it was for many markets during 2023-2024 — properties do not cash flow without substantial equity.
| Period | Avg Cap Rate | Avg Mortgage Rate | Spread |
|---|---|---|---|
| 2015-2019 | 6.0% | 4.5% | +150 bps |
| 2020-2021 | 5.5% | 3.5% | +200 bps |
| 2022-2023 | 5.5% | 7.0% | -150 bps |
| 2024-2025 | 6.0% | 7.0% | -100 bps |
| Early 2026 | 6.5% | 7.0% | -50 bps |
The negative spread environment of 2022-2025 forced many investors to the sidelines. As of early 2026, cap rates have expanded modestly while rates remain elevated, narrowing the gap. Positive-spread deals exist primarily in secondary and tertiary markets or in value-add situations where you can force NOI higher through renovation and better management.
When a “Low” Cap Rate is Still a Good Deal
Do not automatically dismiss low cap rate properties. Consider:
- Appreciation markets: A 4% cap rate property in a market appreciating at 6% annually produces a 10% total return before leverage effects.
- Below-market rents: If current rents are 20% below market, the cap rate based on pro forma (achievable) rents may be 6%+ while the in-place cap rate shows 4.5%.
- Tax benefits: Depreciation, cost segregation, and 1031 exchanges are not captured in cap rate. A 4% cap rate property with aggressive depreciation may produce zero taxable income.
- Risk reduction: Lower cap rate properties in strong markets have lower vacancy risk, lower tenant default risk, and more predictable cash flows. For investors prioritizing capital preservation, a 4% cap rate in a gateway market may be preferable to an 8% cap rate in a volatile tertiary market.
When a “High” Cap Rate is a Red Flag
Conversely, a high cap rate does not always mean a good deal:
- Deferred maintenance: The property may need $50,000+ in capital expenditures that are not reflected in the price.
- Declining market: Population loss, employer departures, or regulatory changes (rent control, STR bans) can cause rents to fall.
- Problematic tenants: High-cap-rate properties in rough areas often come with higher turnover, more evictions, and higher management costs — expenses that may not be reflected in the seller’s pro forma.
- Overstated income: Verify actual rent rolls, not what the seller claims the property “could” rent for.
How to Use Cap Rate in Your Analysis
Cap rate should be one of several metrics you evaluate, not the only one. A complete analysis also includes:
- Cash-on-cash return — measures return on your actual invested capital, accounting for leverage. See Cash-on-Cash Return Explained.
- DSCR — ensures the property can service its debt. See our DSCR loan guide.
- Total return — cash flow + appreciation + principal paydown + tax benefits.
- 5-year projection — models how the investment performs over time with rent growth and appreciation.
Our rental property calculator computes all of these metrics simultaneously so you can evaluate a deal holistically.
Worked Example: Comparing Two Deals
Property A: $400,000 duplex in Nashville, $3,200/month gross rent, $14,400/year expenses.
- NOI: ($3,200 x 12) - $14,400 = $24,000
- Cap rate: $24,000 / $400,000 = 6.0%
Property B: $180,000 single-family in a small Midwest city, $1,500/month rent, $7,200/year expenses.
- NOI: ($1,500 x 12) - $7,200 = $10,800
- Cap rate: $10,800 / $180,000 = 6.0%
Same cap rate, very different risk profiles. Property A is in a growing secondary market with strong population trends and multiple demand drivers. Property B is in a market where a single employer closure could collapse rental demand. The cap rate alone does not tell you which is the better investment — you need to evaluate the full picture.
Frequently Asked Questions
Is a higher cap rate always better?
No. A higher cap rate means higher income relative to price, but it also signals higher risk. Properties in declining markets, poor condition, or with unreliable income streams trade at high cap rates precisely because investors demand a higher return to compensate for the additional risk. Always investigate why a cap rate is high before assuming it represents a good deal.
What cap rate should I look for as a new investor?
For your first property, targeting a 6-8% cap rate in a stable secondary market is a reasonable starting point. This range typically provides positive cash flow with conventional financing while avoiding the highest-risk properties. As you gain experience and build systems for property management, you can expand into higher-cap-rate tertiary markets or lower-cap-rate appreciation plays.
How does cap rate change over time?
Cap rates fluctuate with market conditions. When interest rates fall and investor demand rises, cap rates compress (prices go up faster than rents). When rates rise and demand cools, cap rates expand. Over the past two decades, cap rates have generally trended downward due to sustained low interest rates and increased institutional investment in residential real estate — though the 2022-2025 rate hiking cycle reversed this trend in many markets.
Should I use cap rate to evaluate a flip?
No. Cap rate is a metric for income-producing properties. Fix-and-flip deals should be evaluated using the 70% rule and after-repair value (ARV) analysis. Use our flip calculator for those deals.
Can I calculate cap rate on a property I plan to renovate?
Yes, but calculate two cap rates: the in-place cap rate based on current income and purchase price, and the stabilized cap rate based on projected income after renovation and total investment (purchase price + rehab costs). The spread between these two numbers represents the value you are creating through the renovation.