"What's a good cap rate?" might be the most common question in real estate investing. The frustrating answer: it depends. But this guide will give you concrete benchmarks and a framework for evaluating whether a cap rate makes sense for any given deal.

Why Cap Rates Vary So Much

Cap rates reflect risk and return expectations. Lower cap rates indicate:

• Lower perceived risk
• Higher demand from buyers
• More stability expected
• Higher prices relative to income

Higher cap rates indicate:

• Higher perceived risk
• Less buyer competition
• More uncertainty
• Lower prices relative to income

A 4% cap rate in Manhattan isn't "bad" and a 12% cap rate in a small town isn't necessarily "good." They reflect entirely different risk profiles.

2024-2025 Cap Rate Benchmarks by Property Type

Multifamily

Multifamily remains relatively compressed due to housing demand and institutional investor interest.

Industrial/Warehouse

Industrial has been the darling of commercial real estate, though cap rates have expanded slightly from 2021-2022 lows.

Retail

Retail varies enormously based on tenant mix and format.

Office

Office has seen the most dramatic cap rate expansion since 2020 due to remote work uncertainty.

Single-Family Rentals

Build-to-rent communities typically trade tighter (lower cap rates) than scattered-site portfolios.

How Location Affects Cap Rates

By Market Tier

The Risk-Return Logic

Gateway cities command lower cap rates because:

• Deeper buyer pools (more liquidity)
• Diversified economies
• High barriers to entry
• Established rent growth track records

Smaller markets require higher cap rates because:

• Less institutional demand
• Economic concentration risk
• Lower liquidity (harder to sell)
• Less predictable appreciation

The Cap Rate vs Interest Rate Relationship

The spread between cap rates and borrowing costs matters for leveraged investors:

Positive Leverage: Cap rate > Debt cost

$100K NOI on a 6% cap rate ($1.67M property) with 5% debt costs = positive cash flow

Negative Leverage: Cap rate < Debt cost

$100K NOI on a 5% cap rate ($2M property) with 7% debt costs = negative cash flow (without sufficient down payment)

In 2023-2025, higher interest rates have pushed many deals into negative leverage territory, forcing cap rates to expand or prices to fall.

Historical Context

Cap rates generally follow interest rates with a lag. The 2022-2023 rate spike pushed cap rates higher; any future rate cuts could compress them again.

How to Evaluate Cap Rates

Step 1: Compare Apples to Apples

Don't compare a Class A multifamily cap rate to a Class C office building. Compare:

• Same property type
• Same class/quality
• Same market
• Same risk profile

Step 2: Understand What's Included

NOI calculations can vary. Ask:

• Are reserves included in expenses?
• Is management normalized (or owner-operated)?
• Are any one-time expenses excluded?
• Is occupancy stabilized?

An artificially low expense load inflates NOI and understates the true cap rate.

Step 3: Consider Going-In vs Exit

Your "going-in" cap rate is what you buy at. Your "exit" cap rate is what you sell at.

If you buy at 6% and sell at 7%, you'll take a value hit—even if NOI grows.

Conservative underwriting assumes exit cap rates 0.25-0.50% higher than going-in (cap rate expansion).

Step 4: Risk-Adjust Your Target

For each risk factor, expect a higher cap rate:

Common Cap Rate Mistakes

1. Assuming High Cap Rate = Good Deal

A 10% cap rate might indicate serious problems—high vacancy, deferred maintenance, declining market, or economic risk.

2. Assuming Low Cap Rate = Bad Deal

A 4.5% cap rate in a high-growth market with strong appreciation might outperform an 8% cap rate in a stagnant market.

3. Ignoring Cap Rate Trends

Buying at today's 5% cap rate when the market is moving to 6% means instant paper loss.

4. Using Asking Price Cap Rates

Sellers calculate cap rates using asking prices. Real cap rates are based on actual transaction prices.

5. Not Adjusting for Rate Environment

What's "good" at 3% interest rates differs from what's "good" at 7% rates.

Key Takeaways

• "Good" cap rates depend on property type, location, and risk profile
• 2025 ranges: Multifamily 4.5-7.5%, Industrial 4.5-8%, Office 5.5-12%+, Retail 5.5-12%+
• Higher cap rates indicate higher risk/return; lower cap rates indicate stability
• Compare similar properties—apples to apples only
• Cap rates move with interest rates (with a lag)
• A high cap rate isn't automatically good; a low cap rate isn't automatically bad
• Focus on whether the cap rate appropriately compensates for the specific risks

The right cap rate target depends on your risk tolerance, investment goals, and the specific opportunity. Use these benchmarks as a starting point, then dig into what's driving any given property's cap rate before deciding if it makes sense.