What's a "Good" Cap Rate? Here's the Real Answer

from the "Alphabet Soup" for Investors Series

Author

Roger Blankenship
November 10, 2025 • Estimated Reading Time: 4 minutes

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What’s a Good Cap Rate? Depends on This.

Every investor wants to know: What’s a good cap rate? The truth is, there’s no universal answer — because “good” depends entirely on context.

Cap Rate (Capitalization Rate) is the property’s annual net operating income (NOI) divided by its purchase price or current market value. It’s a quick way to estimate the potential return on an all-cash purchase — before considering financing or taxes.

A 6% cap rate in one market might be amazing, while in another, it’s a warning sign. Why? Because cap rate is a snapshot of return relative to risk, and both vary dramatically depending on location, property type, tenant stability, and market momentum.

Let’s break it down:

  • Location matters. In major metros like Atlanta or Dallas, lower cap rates (5–6%) reflect lower perceived risk and stronger long-term appreciation. In smaller or declining markets, investors demand higher returns — hence 8–10% cap rates.

  • Asset class matters. Single-family rentals and stabilized multifamily tend to trade at lower cap rates because they’re considered more predictable. Mobile home parks, motels, or C-class apartments command higher cap rates to compensate for volatility.

  • Interest rates and financing matter. When borrowing costs rise, buyers expect higher cap rates to maintain cash flow. The “spread” between your financing rate and your cap rate determines your leverage risk.

  • Your goals matter. A 6% cap might work perfectly for a long-term wealth builder seeking appreciation. A 10% cap might be better for a cash-flow investor who values income over equity growth.

Here’s the real takeaway:

A “good” cap rate is the one that fits your strategy, risk tolerance, and local market reality.

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