What Is a Good Cap Rate?

Compare like with like

Start with recent transactions involving the same property type, quality, and location. A stabilized apartment in a supply-constrained neighborhood should not be benchmarked against an older retail property with near-term lease expirations. Local comparable sales provide better context than a national rule of thumb.

Why lower cap rates can make sense

Buyers may accept a lower current yield for newer construction, dependable tenants, long leases, a strong location, or credible rent growth. The lower cap rate reflects stronger demand and a higher price for each dollar of current NOI.

Why higher cap rates require scrutiny

A higher cap rate can indicate an attractive price, but it can also signal vacancy, deferred maintenance, volatile tenants, weak local demand, short leases, or unusually high operating costs. Verify the income and expense statements before treating the spread as extra return.

Questions to ask before accepting the number

• Is current rent sustainable and supported by the market?
• Does NOI include a realistic vacancy and maintenance allowance?
• Are taxes likely to reset after the sale?
• Are major repairs or tenant improvements approaching?
• How does the result compare with recent nearby sales?

Cap rate is only the starting point

Cap rate excludes financing and does not model future cash flows. Pair it with cash-on-cash return, debt-service coverage, lease review, inspection findings, and a multi-year cash-flow forecast before making an investment decision.