What is a good cap rate? One that pays you enough for the risk of the building, the market and the debt you use, and still works when you sell. No single percentage is good for every apartment deal. A cap rate is a price expressed as a yield, so a "good" one is relative to what else you could earn and what could go wrong.
This guide gives you a way to judge it. If you need the basics first, start with the glossary entry on the cap rate. If you already have the numbers, our cap rate calculator does the math in seconds.
What Is a Good Cap Rate? The Short Answer
A cap rate is net operating income divided by price. A $6,000,000 building with $330,000 of NOI trades at a 5.5% cap rate. (Illustrative numbers.) That is the whole formula. The judgment is in deciding whether 5.5% is enough.
Anyone who gives you a flat "good cap rate is X%" is skipping the work. The same 5.5% can be a fair price for a stable building in a strong market and a bad price for a tired one. We are not quoting a benchmark here on purpose. Published cap rate surveys change by market and by quarter, and a stale number will mislead you.
Four things decide whether a cap rate is good:
- Your cost of debt.
- What similar buildings in the same market just sold for.
- How the cap rate you pay compares with the one you will sell at.
- How risky the building is.
Compare the Cap Rate With Your Cost of Debt
The first test is simple: does the building's yield beat what the loan costs you?
Use the loan's annual payment divided by the loan amount, often called the debt constant. Say you buy that $6,000,000 building with a $3,900,000 loan (65% of price) at 6.5% interest, amortized over 30 years. (Illustrative.) The annual payment is about $295,800, which is a debt constant near 7.6%. The building yields 5.5%.
That is negative leverage: the loan costs more than the property earns. You cover the gap out of your own pocket, or you count on NOI growth to close it. Here, NOI of $330,000 against $295,800 of debt service is a debt service coverage ratio of about 1.12, thin for most lenders. See the glossary entry on debt service coverage ratio for how lenders read that number.
This does not mean the deal is dead. It means the cap rate alone does not make it good. You are buying growth, and you need a plan for it. Our guide on how to increase NOI covers where that growth comes from.
What Is a Good Cap Rate for Multifamily in Your Market?
The best evidence of a good cap rate for multifamily is what comparable buildings recently sold for. Pull sales of similar size, age and condition within the same submarket, and compute each one's cap rate from its actual NOI. That range, not a national average, is your benchmark.
A few rules for comps:
- Match the building. A 1980s 40-unit in Sparks and a new 200-unit near the river do not share a cap rate.
- Use trailing NOI, not the seller's pro forma. Ask what the numbers look like after a real management fee, property taxes at your price and a fair reserve.
- Check the date. A sale from before rates moved tells you little about today.
Our article on multifamily cap rates goes deeper on what separates strong deals from weak ones at the same stated rate.
What Is a Good Cap Rate for Rental Property?
The same logic applies to any rental property, with one added caution: small-property cap rates are often built on thin or unverified expense numbers. When someone quotes you a cap rate on a rental, ask which expenses are in the NOI.
A cap rate that leaves out management, reserves or vacancy looks higher than it is. Put them back in before you compare. A 7% cap rate with no management fee and no reserves may be closer to 5.5% once you do. (Illustrative.)
Going-In Cap Rate vs Exit Cap Rate
The going-in cap rate is what you pay. The exit cap rate is what you assume a buyer will pay when you sell.
Most underwriting sets the exit rate at or above the going-in rate, because the building will be older and you cannot know what rates will be. Using a lower exit cap than your entry flatters the deal.
See how much it matters with one example (illustrative). Say NOI is $330,000 and you assume a 6.0% exit cap rate instead of 5.5%. The building is then worth $5,500,000, not $6,000,000, even though income did not move. If you raise NOI to $390,000 through better operations and sell at that same 6.0%, the value is $6,500,000. The lesson: a deal should still work if the exit rate is higher than the entry rate. If it only works with a lower one, the cap rate is not good, it is hopeful.
How Risk and Asset Class Change a Good Cap Rate
Cap rates rise with risk. Buyers accept a lower yield for income they trust and ask for a higher yield when the income is less certain.
In general terms, investors reason like this:
- Class A: newer buildings in strong locations. Demand and income are steadier, so buyers pay more per dollar of NOI, which means a lower cap rate. The tradeoff is less room to add value.
- Class B: older but well located buildings. Often the middle ground, with room to grow NOI through renovations and better management.
- Class C: older buildings, weaker locations or heavier repair needs. Buyers want a higher cap rate to cover more turnover, more deferred maintenance and more surprises.
A higher cap rate is not a bargain by itself. It is the price of risk, and you only win if you can manage that risk. The cap rate you pay for a building that needs work should leave room for the work.
Cap Rates by Property Type
Cap rates by property type differ because buyers price different risks. Apartments rely on many small residents and short leases, so income adjusts quickly to the market. Office, retail and industrial buildings usually rest on fewer, longer leases, so buyers weigh the credit of the business renting the space, lease length and how easily a space re-leases.
We do not quote a ranking of types here. Published figures change by quarter and region, and they come from different surveys with different methods. If you want numbers, pull the latest report from a source you trust and check its date. Never compare a figure from one property type with a figure from another unless they come from the same source and the same period.
How Interest Rates Move Cap Rates
Cap rates and interest rates tend to move together, because buyers who borrow need the property to earn more as debt gets more expensive. Freddie Mac's 2025 Multifamily Outlook describes how this played out: high and volatile interest rates, rising cap rates and lower asset values slowed the transactions market, and cap rates had since flattened out.
That is why a cap rate that looked good when borrowing was cheap can look thin now. When you underwrite, test the deal at a higher interest rate and a higher exit cap rate. A good deal survives both.
A Simple Checklist for Judging a Cap Rate
Before you call a cap rate good, check each of these:
- Is the NOI real? Use trailing numbers with a true management fee, reserves and property taxes at your price.
- Does it beat or approach your debt constant, or do you have a clear path to close the gap?
- Is it in line with recent comparable sales in the same submarket?
- Does the deal still work at a higher exit cap rate?
- Does the rate match the risk of the building and the work it needs?
If you can answer yes to most of these, the cap rate is good for you, on that building. Run your own deal through the cap rate calculator, then ask someone who operates the building to pressure-test the NOI. That is what we do at Next Level Property Management for apartments in Reno, Sparks, Carson City and Lake Tahoe.
