Understanding cap rates is fundamental to real estate investing. But "good" is relative—what's excellent in San Francisco might be mediocre in Detroit.
What is Cap Rate?
Cap rate (capitalization rate) measures a property's return independent of financing. It's the ratio of Net Operating Income (NOI) to purchase price.
Formula:
Cap Rate = (Net Operating Income / Purchase Price) × 1002024 Cap Rate Benchmarks by Property Type
| Property Type | Low | Average | High |
|---|---|---|---|
| Class A Multifamily | 4.0% | 5.0% | 6.0% |
| Class B Multifamily | 5.0% | 6.5% | 8.0% |
| Class C Multifamily | 6.5% | 8.0% | 10.0% |
| Single Family | 5.0% | 7.0% | 9.0% |
| Small Retail | 6.0% | 7.5% | 9.0% |
Cap Rates by Market Type
Appreciation Markets (Lower Cap Rates: 3-5%)
Balanced Markets (Medium Cap Rates: 5-7%)
Cash Flow Markets (Higher Cap Rates: 7-10%+)
What Affects Cap Rate?
The Cap Rate Trap
Don't chase high cap rates blindly. A 10% cap rate in a declining area might be worse than a 5% cap rate in a growing market when you factor in:
How to Use Cap Rate
Our calculators automatically compute cap rate and show how it compares to market averages.
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