What is a good cap rate?
There is no single right number. A good cap rate depends on the market, the property and how much risk you accept. Here is how to judge one, with real numbers from 347 large U.S. cities.
Cap rate in one line
Cap rate = annual net operating income ÷ purchase price × 100
Net operating income (NOI) is rent after vacancy minus operating costs such as taxes, insurance, maintenance and management. The mortgage is left out, so cap rate compares properties as if you paid cash. Learn the details in how to calculate NOI.
What the data says
We modeled a median-priced home at median rent in 347 U.S. cities with at least 100,000 residents, using Census 2024 data and the same expense assumptions everywhere. The results:
- The median modeled cap rate is 2.4%. Half of large cities are above it and half below.
- The middle half of cities fall between 1.9% and 2.9%.
- Cities reaching a 5% cap rate or more: 5 of 347. Reaching 8% or more: 1 of 347.
These modeled figures understate what a well-bought rental can earn: median rent covers every rental unit, including smaller apartments, while median home value covers owner-occupied houses. Use them to compare cities with each other, not as the return on a specific property.
See every city in our ranking of the best cities for rental cash flow.
Why cap rates differ so much
- Price relative to rent. Expensive coastal metros have high home values but rents that have not kept pace, which pushes cap rates down.
- Risk. Higher cap rates often come with higher vacancy, older buildings, weaker job markets or more tenant turnover. Investors demand a higher return for taking that risk.
- Growth expectations. Buyers accept lower cap rates where they expect rents and values to rise faster.
- Property type and condition. A renovated single-family home and a tired fourplex in the same city can trade at very different cap rates.
Compare cap rate with your interest rate
A useful test: if the cap rate is below your mortgage rate, borrowing reduces your return on cash instead of increasing it, often called negative leverage. With rates around 6.5%, many median-priced homes fall into that zone, which is why cash flow is hard to find without buying below the median, putting more money down or adding value through renovation.
So what should you look for?
Rules of thumb vary, but many small investors treat roughly 5% to 6% as thin in most markets and look for more in lower-cost areas, while accepting less in high-growth, high-price cities. Rather than chase a number, compare a property's cap rate with similar properties nearby and with your financing cost, then check cash flow and cash-on-cash return.
Calculate the cap rate of a specific property.
Open the cap rate calculator →General information for U.S. landlords, not legal, tax or insurance advice. Rules vary by state and city; confirm requirements with a local attorney, licensed agent or tax professional.