What's a good cap rate?
Why "good" cap rate depends on the asset class, market, and rate environment — and how to think about cap rate the way buyers and sellers actually do.
There's no universal answer
Cap rate is a price. A 5% cap rate building costs 20× its NOI. A 10% cap rate building costs 10× its NOI. Asking "is 7% a good cap rate" is like asking "is $50 a good price for a car" — depends entirely on the car and the market.
How cap rates actually move
Cap rates move with three things:
Risk-free rate. When the 10-year Treasury is 4%, cap rates can't be 4% — investors demand a premium for illiquid, management-intensive real estate. The spread to Treasuries is typically 250-400 bps for institutional-quality assets, wider for riskier classes.
Asset class risk. Multifamily and class-A office trade at tighter (lower) cap rates because the cash flows are perceived as safer. Hotels, single-tenant retail, and class-B/C industrial trade at wider (higher) caps.
Market trajectory. A 5% cap in Austin in 2018 was a steal because rents grew 10%/yr; a 5% cap in a shrinking metro is dead money.
Rough 2024-2025 cap rate ranges
These move every quarter — verify before underwriting:
| Asset class | Cap rate range |
|---|---|
| Class A multifamily, top metros | 5.0-5.5% |
| Class B multifamily, secondary markets | 6.0-7.5% |
| Class C multifamily, value-add | 7.5-9.0% |
| Stabilized retail strip (NNN) | 6.5-8.0% |
| Single-tenant credit retail (Walgreens, etc.) | 5.5-7.0% |
| Industrial, infill | 5.5-7.0% |
| SFR rentals | 5.5-8.0% |
| Office (suburban) | 8.0-10%+ |
How to use cap rate
Cap rate is most useful for ranking comps within a single market and asset class. "Three nearly identical 100-unit B-class multifamily buildings in the same metro just traded at 6.2%, 6.4%, 6.7%. What did the 6.7% buyer see that the others didn't?"
Cap rate is least useful for deciding if a deal pencils. That's a cash-on-cash, DSCR, and IRR question.
Compute yours
Use the Cap Rate Calculator. If you don't have a clean NOI figure, the calculator can build one from gross rent and operating expenses. Just remember: broker pro-forma cap rates almost always overstate NOI. Re-underwrite with your own assumptions before trusting the headline number.
Powered by DealMath