What Is a Good Cap Rate? By City and Property Type (2026)

The Cap Rate Formula Explained

Cap rate is calculated by dividing a property's Net Operating Income (NOI) by its current market value or purchase price.

Formula: Cap Rate = NOI / Property Value

Net Operating Income is the annual income the property produces after operating expenses but before mortgage payments. Operating expenses include property taxes, insurance, maintenance, property management fees, and a vacancy allowance. They do not include debt service.

Step-by-step example:

• Gross annual rent: $36,000 (three units at $1,000 per month each)
• Vacancy allowance at 5 percent: -$1,800
• Effective Gross Income: $34,200
• Property taxes: -$4,500
• Insurance: -$1,800
• Maintenance and repairs: -$2,400
• Property management at 10 percent: -$3,420
• NOI: $22,080
• Purchase price: $320,000
• Cap Rate: $22,080 / $320,000 = 6.9 percent

Use our cap rate calculator to run these numbers instantly for any property you are evaluating. You can also use the rental property calculator to model full cash flow projections alongside cap rate.

What Does Cap Rate Actually Tell You?

Cap rate answers a simple question: if you bought this property with all cash, what percentage return would you earn from the income alone in year one? A 7 percent cap rate means a hypothetical all-cash buyer would earn 7 cents of NOI for every dollar invested.

Beyond measuring return, cap rate is a valuation tool. Investors and appraisers use market cap rates to determine what an income-producing property is worth. If the prevailing cap rate for similar properties in a neighborhood is 6.5 percent and a property generates $26,000 in NOI, its estimated value is $26,000 / 0.065 = $400,000. If a seller is asking $450,000, that implies a cap rate of only 5.8 percent — potentially overpriced unless the buyer has a plan to increase NOI.

Cap rate also has an inverse relationship with property value: as cap rates compress (fall), property values rise. When the Federal Reserve raises interest rates, cap rates tend to expand because investors demand higher yields to compete with safer fixed-income alternatives. This is why rising rate environments often put downward pressure on real estate prices.

Average Cap Rates by US City (2026)

Cap rates vary enormously by geography. Here are approximate ranges for major US markets in 2026, based on residential multifamily and small investment properties. These ranges reflect stabilized, market-rate properties in established neighborhoods — distressed properties and value-add deals may trade at higher cap rates.

Low Cap Rate Markets (3 to 5 percent)

San Francisco, CA: 3.0 to 4.5 percent. Among the lowest in the nation. Extreme land constraints, strong job market, and decades of above-average appreciation have driven prices far above what rents can justify on a pure income basis.

New York City, NY: 3.5 to 5.0 percent. Varies significantly by borough. Manhattan condos used as rentals can compress to 2 to 3 percent; outer borough multifamily trades closer to 4 to 5 percent.

Seattle, WA: 3.5 to 5.0 percent. Tech sector employment has kept demand and prices elevated, compressing yields relative to income.

Los Angeles, CA: 3.5 to 5.0 percent. Strict rent control laws (especially in the city of LA) limit NOI growth, yet prices remain high due to constrained supply and persistent demand.

Boston, MA: 4.0 to 5.5 percent. University-driven demand keeps occupancy high and rents strong, but prices are commensurately elevated.

Denver, CO: 4.5 to 6.0 percent. Strong post-pandemic in-migration drove prices up significantly from 2020 to 2023; cap rates have since risen modestly but remain below national averages.

Moderate Cap Rate Markets (5 to 7 percent)

Austin, TX: 5.0 to 6.5 percent. A wave of new apartment supply in 2023 and 2024 moderated rent growth, allowing cap rates to normalize somewhat after several years of compression.

Nashville, TN: 5.0 to 6.5 percent. Similar story to Austin — strong population growth but substantial new supply has balanced the market.

Charlotte, NC: 5.5 to 7.0 percent. Growing financial services and tech presence supports rents, with slightly higher yields than the coastal metros.

Phoenix, AZ: 5.0 to 6.5 percent. After extraordinary rent growth in 2021 and 2022, the Phoenix market has stabilized with competitive but not extreme cap rates.

Atlanta, GA: 5.5 to 7.0 percent. Diverse economy, in-migration, and relatively affordable land prices support a balanced market.

Dallas-Fort Worth, TX: 5.0 to 6.5 percent. Extremely active construction pipeline keeps rents in check and supports moderate cap rates.

Higher Cap Rate Markets (7 to 10+ percent)

Indianapolis, IN: 7.0 to 9.0 percent. Consistently one of the most landlord-friendly and affordable markets in the country, with stable rents and strong cash flow potential.

Memphis, TN: 7.5 to 10.0 percent. Higher cap rates reflect a lower-income tenant base, older housing stock, and somewhat elevated management intensity — but cash flow numbers are among the best in the nation.

Cleveland, OH: 7.0 to 9.5 percent. Great Lakes cities offer strong cash flow metrics but slower appreciation. Ideal for buy-and-hold cash flow investors.

Kansas City, MO: 6.5 to 8.5 percent. A perennial favorite among out-of-state cash flow investors for its stable economy, affordable prices, and above-average yields.

Detroit, MI: 8.0 to 12.0 percent. The highest cap rates in any major US market. Attractive to cash-flow-focused investors but carries elevated vacancy risk and property management challenges.

Pittsburgh, PA: 6.5 to 8.5 percent. University-anchor stability, affordable housing stock, and decent rents make this an underrated cash flow market.

Cap Rates by Property Type

Beyond geography, the type of property significantly influences what cap rate is "normal." Here is how different asset classes compare.

Single-Family Rentals (SFR)

Single-family homes typically trade at cap rates of 4 to 7 percent in most markets. They are more expensive per unit than multifamily and often command higher prices relative to rent because buyers include both investors and owner-occupants who bid up prices. However, SFRs offer lower management intensity, better tenant quality on average, and stronger resale liquidity.

Small Multifamily (2 to 4 units)

Duplexes, triplexes, and fourplexes generally offer cap rates of 5 to 8 percent. They benefit from economies of scale — one roof, one lot, multiple income streams — and can be purchased with conventional or FHA financing if owner-occupied. This is the most popular entry point for new investors.

Large Multifamily (5+ units)

Apartment buildings with five or more units are priced using commercial valuation methods almost exclusively, making cap rate the primary metric. Class A apartments (new construction, premium amenities) trade at 4 to 5.5 percent cap rates. Class B (well-maintained, 15 to 30 years old) trade at 5.5 to 7 percent. Class C (older, workforce housing) trade at 7 to 10 percent or higher.

Commercial Properties

Retail strip centers average 6 to 8 percent. Industrial/warehouse properties have seen cap rate compression to 4 to 6 percent due to e-commerce demand. Office buildings have the widest range (5 to 9 percent or higher) reflecting the post-pandemic uncertainty around remote work. Net lease retail (think fast-food chains and pharmacies) trades at very low cap rates of 4 to 6 percent due to the stability of long-term, corporate-guaranteed leases.

Understanding Property Class: A, B, and C

The property class system is shorthand for describing the quality, age, and tenant profile of a rental property. It directly affects what cap rate the market assigns to a property.

Class A properties are new or recently renovated buildings in the best locations, with premium finishes, amenities, and a high-income tenant base. They command the highest rents, the lowest vacancy, and the lowest cap rates. Investors pay a premium for stability and institutional quality.

Class B properties are well-maintained but older (typically 15 to 30 years), in good but not premium locations. They attract middle-income tenants and offer a balance of cash flow and appreciation. This is the sweet spot for many individual investors.

Class C properties are older, in lower-income areas, and often require more active management. They offer the highest cap rates but also the highest risk — more maintenance, higher turnover, more challenging tenant screening. The cash flow numbers can look excellent on paper, but actual returns often fall short of projections due to management friction and capital expenditures.

Cap Rate vs. Interest Rates: The Critical Relationship

Cap rates do not exist in isolation. They move in relation to interest rates. When the Federal Reserve keeps rates low, investors can borrow cheaply, so they accept lower cap rates because the spread between their borrowing cost and cap rate (the so-called "cap rate spread") still looks attractive. When interest rates rise, investors demand higher cap rates to maintain that spread, which puts downward pressure on property values.

In 2022 and 2023, when the Fed raised the federal funds rate from near zero to over 5 percent, cap rates began expanding in many markets and property values fell in some sectors. By 2026, the market has partially adjusted, but investors should always consider the spread between current mortgage rates and the cap rate when evaluating a deal. If you can borrow at 7 percent but cap rates in your market are 5 percent, you are "negative leveraged" — financing actually hurts your return rather than helping it.

Positive leverage exists when the cap rate exceeds your borrowing rate. If cap rates are 8 percent and you borrow at 6.5 percent, leverage amplifies your return on equity. Understanding this relationship is essential to evaluating whether debt improves or worsens a particular deal.

When a Low Cap Rate Is Actually a Good Deal

A 4 percent cap rate in San Francisco is not automatically a bad investment. Here is why context matters.

Appreciation potential: In markets with severe supply constraints, strong job markets, and desirable amenities, property values have historically grown far faster than the broader market. A 4 percent cap rate in a market that appreciates 7 percent annually delivers a superior total return over 10 years compared to a 9 percent cap rate in a flat or declining market.

NOI growth: A property with below-market rents that you can legitimately raise over time may show a low initial cap rate but a much higher "stabilized" cap rate. Buying a property at a 5 percent cap rate and growing NOI to produce an 8 percent cap rate on your purchase price is an excellent value-add outcome.

Risk adjustment: Lower cap rates often reflect lower risk. A triple-net retail property leased to an investment-grade corporation for 15 years at a 4.5 percent cap rate carries far less operating risk than a Class C apartment building at a 9 percent cap rate. If stability and passive income matter more to you than maximizing current yield, a lower cap rate may be appropriate.

How to Use Cap Rate in Your Investment Decision

Cap rate should be one input in your analysis, not the only one. Use it to quickly screen properties and compare deals in the same market. Use it to value properties using the income approach. Use it to gauge how a deal compares to market norms — if every comparable property sells at a 6 percent cap rate and the seller wants a 4 percent cap rate on this one, that is a red flag.

But also consider cash-on-cash return (which accounts for your financing), total ROI (which includes appreciation and tax benefits), the quality of the location and tenant base, and your personal investment timeline. A complete analysis using the rental property calculator alongside the cap rate calculator will give you the full picture before you commit your capital.

Frequently Asked Questions