What Is a Good Cap Rate?

Quick answer (featured snippet)

What is a good cap rate? The practical definition

Cap rate (capitalization rate) = Net Operating Income (NOI) ÷ Purchase Price (or Market Value).

• NOI = gross rental income − operating expenses (taxes, insurance, maintenance). Excludes debt service and income tax.
• Think of the cap rate as the unlevered yield if you bought the property in cash — a quick apples‑to‑apples income snapshot, not a crystal ball of appreciation or equity growth.

Example: NOI $150,000 ÷ Price $2,000,000 = 7.5% cap rate.

Why cap rate matters (and what it doesn’t do)

Cap rates let investors compare income‑producing assets today. They respond to interest rates, bond yields, tenant credit, lease structure (NNN vs. gross), and local fundamentals like vacancy and new supply. But cap rates don’t predict future rent growth, aren’t a replacement for IRR or cash‑on‑cash returns, and won’t tell you about potential obsolescence.

Key takeaway: Cap rate = quick yield metric. Combine with appraisal comps, market trends, and financing stress tests.

The major drivers behind cap rate movement

• Interest rates & 10‑year Treasury yields (long-term rates set the floor).
• Investor risk appetite — when nerves spike, cap rates widen.
• Property fundamentals: vacancy, rent growth, and new supply.
• Lease structure & tenant quality — long‑term NNN leases with investment‑grade tenants compress caps.
• Local dynamics — think Tampa Bay logistics hubs vs. older Rust Belt office submarkets.

2024–2025 market benchmarks, risk profiles, and how to evaluate

2024–2025 market benchmarks (ballpark national guidance)

These are starting points. Submarket beats national averages every time — so pull local comps.

Benchmarks by investment risk profile

• Core / Low‑risk: 4.5%–6.0%
• Core‑plus / Stable: 5.0%–7.0%
• Value‑add: 6.0%–8.0%
• Opportunistic / Distressed: 8.0%–12%+

Bottom line: A “good” cap rate is one that compensates you for risk relative to bonds and equities while leaving room for financing and upside.

How to evaluate whether a cap rate is good for you

1. Compare to local comps — same asset class, similar vintage, and lease structure.
2. Compare to your cost of capital — if financing wipes out your unlevered return, the math fails.
3. Look at the spread to the 10‑year Treasury — historically 100–300 bps premium depending on risk.
4. Factor expected NOI growth — a low cap can be fine with strong rent upside.
5. Analyze lease structure & tenant credit — long NNN leases and investment‑grade tenants justify lower caps.
6. Stress‑test scenarios — vacancy spikes, capex surprises, tenant churn.

Real-world comparison: Industrial vs. Office

• Industrial: Warehouse at 6.2% cap, credit tenant, long lease in a logistics hub = lower risk; predictable NOI.
• Office: Older downtown office at 9.0% cap, several vacant floors = higher yield but bigger headaches (TI, retrofitting, possible obsolescence).

Interpretation: Higher caps often equal higher risk, not necessarily a “better” deal.

Common misconceptions

• “Higher cap rate = better deal.” Not always — it often reflects deferred capex or risk.
• “Cap rate predicts total return.” No — appreciation, rent growth, and leverage matter.
• “Cap rates are uniform.” They vary by market, submarket, and tenant mix.

Reminder: Use cap rates as one tool in a broader underwriting toolset (IRR, cash‑on‑cash, DSCR).

Practical checklist before you act

Tools & next steps

• Use cap‑rate, cash‑on‑cash, and IRR calculators (broker research pages or ask for an Excel template).
• Read CBRE U.S. Cap Rate Surveys and IRR mid‑year viewpoints for sector color.

Final thought

A “good” cap rate compensates you for risk vs. bonds/equities, fits your financing, and aligns with your strategy. Cap rates are a starting line, not the finish line — especially in dynamic Sunbelt markets like Tampa.