Is a 5% cap rate good?

Fair, but below the usual target

A 5% cap rate means you are paying $20 for every $1 of annual net operating income. On a $250,000 property that is $12,500 of NOI a year, or $1,042 a month after every operating expense and a vacancy allowance — but before the mortgage.

What it means in dollars

Price per $1 of NOI

$20

NOI on $250,000

$12,500/yr

$15,000 NOI is worth

$300,000

Worth knowing at 5%

A 5 cap is common in stable suburban markets with low vacancy and strong tenant demand. It is defensible if the rent is genuinely below market and you have a plan to raise it. It is not defensible as a rate you simply accept.

Higher is not always better

Cap rate is non-monotonic. Up to about 6% a higher number means you are paying less for the same income, which is good. Past 10% it usually means the market is pricing in a risk you have not found yet — vacancy, collections, deferred capital expenditure, or a location losing population. Below 4% a residential rental is priced for appreciation rather than income.

Cap rates compared: NOI required on a $250,000 property.
Cap rate	NOI on $250,000	Paid per $1 NOI	Reads as
3%	$7,500	$33	Thin for a residential rental
4%	$10,000	$25	Fair, but below the usual target
5%	$12,500	$20	Fair, but below the usual target
6%	$15,000	$17	A solid residential cap rate
7%	$17,500	$14	A solid residential cap rate
8%	$20,000	$13	A solid residential cap rate
9%	$22,500	$11	A solid residential cap rate
10%	$25,000	$10	High — read it as a risk signal, not a bargain
12%	$30,000	$8	High — read it as a risk signal, not a bargain

Benchmarks as of 2026 for US residential rentals: under 4% is thin, 6% and above reads as solid, 10% and above is a risk signal. Commercial asset classes trade on entirely different ranges.

Before you trust any cap rate

A cap rate is only as honest as the NOI underneath it. The four things most often wrong with a quoted NOI are a missing management fee, vacancy set to zero, capital expenditure left out entirely, and the mortgage wrongly subtracted. Any one of them moves the rate by more than the difference between the rows in that table.

Work out the cap rate on a real deal Enter the price, the rent and the expenses. The calculator returns NOI, cap rate, cash-on-cash, DSCR and a five-year projection.