What is a good cap rate for rental property?

Capitalization rate (“cap rate”) measures a property's unleveraged annual return — the income it throws off relative to its price, ignoring your mortgage. It's the quickest way to compare two properties on an apples-to-apples basis.

The formula

NOI is annual rental income after vacancy, minus operating expenses (taxes, insurance, maintenance, management, HOA) — but before the mortgage. Example: a $250,000 property with $16,950 of NOI has a cap rate of 16,950 ÷ 250,000 = 6.8%.

So what's “good”?

There's no universal number — it's a trade-off between yield and risk:

• 4–5%: typical in expensive, high-demand metros. Lower yield, but often lower risk and more appreciation upside.
• 6–8%: a common target for solid buy-and-hold rentals in many markets.
• 9%+: usually higher-risk areas or properties needing work — the higher cap rate is compensation for that risk.

A “good” cap rate is one that beats safer alternatives by enough to justify the work and risk of owning real estate. Compare it to current Treasury and savings yields as your floor.

The catch

Cap rate ignores financing, so two investors buying the same property at the same cap rate can have very different actual returns depending on their loan. That's why you should also look at cash-on-cash return, which accounts for your mortgage and down payment.