Cap rate (capitalization rate) is the metric investors quote most — but a "good" cap rate is relative to the market, property type, and your strategy. It measures unleveraged annual return, and while useful, it is only half the picture for a leveraged international investor.
What Is Cap Rate?
Cap rate is a property's annual net operating income (income after operating expenses, before financing) divided by its price. A property netting $18,000 a year on a $300,000 purchase has a 6% cap rate. It expresses the return if you paid all cash, ignoring the loan.
What Ranges Are Realistic?
Cap rates vary widely by market and risk. Prime, low-risk locations often trade at lower cap rates (buyers accept less income for stability and appreciation), while higher-yield markets carry more risk. In many U.S. growth markets, well-underwritten rentals land in a mid-single-digit cap-rate range — but chasing the highest number often means taking on more risk.
Why Higher Isn't Always Better
A very high cap rate can signal a fragile market, deferred maintenance, or weak demand. A slightly lower cap rate in a resilient, growing market may deliver better total returns and fewer headaches. Judge cap rate alongside the market's fundamentals — see recession-resistant markets.
Cap Rate Is Only Half the Story
Cap rate ignores leverage and appreciation. For a financed investor, cash-on-cash return (cash flow relative to cash invested) often matters more, and long-term appreciation can dominate total return. See the trade-off in cash flow vs. appreciation, and always underwrite on real net numbers — what to expect from monthly rental income.
Frequently Asked Questions
What cap rate should I target?
It depends on the market and your goals. Focus on realistic net income and total return, not a single "magic" number.
Is a 10% cap rate great?
Sometimes it reflects a risky market or hidden costs. Investigate why the number is high before assuming it is good.
Does leverage change my return?
Yes — financing can raise your cash-on-cash return above the cap rate. See the DSCR loans guide.
"Cap rate tells you what a property earns. Your strategy tells you whether that is good." — Buldora Research Team
