What Is a Good Cap Rate for a Rental Property?
There is no universal good cap rate — there is only a cap rate that is right or wrong for a given market, asset and risk level.
6.25% vs 7.78%
Cap rate under the mortgage constant. That is negative leverage.
What cap rate actually measures
Cap rate = NOI ÷ purchase price
NOI is income after vacancy and operating expenses, before any mortgage payment.
Because financing is excluded, cap rate describes the property rather than your deal on it. It is the return you would earn buying with cash, and therefore the only yield figure that two buyers with different loans can meaningfully compare. That is its whole job: a common denominator.
Which also means cap rate is best read as the market’s price for an income stream. A low cap rate means buyers are paying a lot for each dollar of NOI — usually because they expect that dollar to grow, or because they think it is unusually safe. A high cap rate means the opposite. Neither is good or bad on its own.
Typical ranges
| Market and asset type | Typical cap rate | What you are usually buying |
|---|---|---|
| Class A, prime coastal or gateway metro | 3.5% – 5.0% | Rent growth and liquidity. Little or no cash flow with debt at current rates. |
| Class B, strong secondary metro | 5.0% – 6.5% | A balance — modest cash flow with real, if slower, appreciation. |
| Class B/C, midwest and south, solid submarket | 6.5% – 8.0% | Cash flow first. Appreciation possible but not the thesis. |
| Class C/D, older stock or tertiary market | 8.0% – 12%+ | Compensation for turnover, collections, CapEx and thin exit liquidity. |
A high cap rate is a warning label, not a bargain
The spread that actually decides the deal
Here is the part most cap-rate guides skip. Whether debt improves your returns depends on cap rate versus your mortgage constant — annual debt service divided by the loan amount. That is the true all-in cost of borrowed money, and it is meaningfully higher than the interest rate because it includes principal.
The $240,000 example — 25% down at 6.75%, 30-year
- NOI
- $15,004
- Cap rate ($15,004 ÷ $240,000)
- 6.25%
- Annual debt service on $180,000
- $14,009
- Mortgage constant ($14,009 ÷ $180,000)
- 7.78%
Cap rate 6.25% < constant 7.78% → negative leverage.
Negative leverage means every borrowed dollar earns 6.25% and costs 7.78%. Borrowing does not magnify the return, it dilutes it — which is why this deal’s cash-on-cash return is about 1.5% while its cap rate is 6.25%. That is not a modelling error. It is the arithmetic of buying a 6% asset with 8% money, and at 2026 rates it describes a very large share of residential deals.
Investors accept negative leverage for defensible reasons — rent growth that will lift NOI above the constant, a value-add plan, or a refinance thesis. It is only a mistake when it is accidental. Check the spread on every deal; it takes ten seconds and it explains more disappointing returns than any other single number.
How to judge a cap rate in practice
Three comparisons, in order of usefulness:
| Compare against | Question it answers | Verdict signal |
|---|---|---|
| Recent sold cap rates in the same submarket | Am I paying a market price? | The only comparison that tells you about price. Everything else tells you about risk. |
| Your mortgage constant | Does leverage help or hurt here? | Cap rate above the constant means debt amplifies returns; below means it dilutes them. |
| The 10-year Treasury yield | Am I being paid for illiquidity and risk? | A thin spread over a risk-free government bond is a poor trade for a leaky roof and a tenant. |
Make the NOI comparable first
You can run the number both ways in the free cap rate calculator — once with the broker’s expense list and once with management and reserves added — and see exactly how much of the advertised yield survives.
Frequently asked questions
Is a higher cap rate better?
Higher cap rate means more income per dollar of price, which is good, and it almost always means more risk, which is not. In an efficient market the two offset. Treat a cap rate well above local comparables as a question to investigate rather than a bargain to grab.
What is a good cap rate for a rental property in 2026?
For residential rentals, roughly 4 to 5.5% in prime metros, 5.5 to 7% in strong secondary markets, and 7.5% or more for older stock or weaker markets. The meaningful test is whether the cap rate matches recent sold comparables in that specific submarket and clears your mortgage constant.
Does cap rate include the mortgage?
No. Cap rate is calculated on NOI, which is measured before debt service. Two buyers financing the same building differently buy the same cap rate but earn very different cash-on-cash returns.
Cap rate vs ROI — what is the difference?
Cap rate is unlevered and annual: NOI divided by price. ROI usually refers to a levered return on the cash you actually invested, and can include principal paydown and appreciation. They answer different questions and are not comparable numbers.
Should I use purchase price or current market value?
Purchase price when you are deciding whether to buy — that is the money at risk. Current market value when you are deciding whether to keep holding, since that measures the return on equity you could redeploy elsewhere.