A good cap rate for rental property generally depends on the location, property type, and the investor's risk tolerance, but here are some up-to-date guidelines for 2025:
- Typical residential rental property cap rates range from about 4% to 6.5% , with capital city properties tending toward the lower end (3.5% to 5%) due to higher growth potential, and regional properties at the higher end (4.5% to 6.5%) due to compensating for lower capital growth.
- In larger metro areas, a cap rate of about 4% to 6% is considered good for residential properties, while in secondary or developing markets, 6% to 8% is more typical.
- Lower cap rates (around 4-6%) generally indicate lower risk and more stable investments with steady income.
- Higher cap rates (7% and above) usually come with higher risk but also potentially greater cash flow.
- For some investors, the "sweet spot" for rental property cap rates is often 7% to 9% , balancing strong cash flow with manageable risk.
- Cap rates under 5% in low-growth or high-cost areas might be a deal-breaker unless other factors like strong appreciation are expected.
- Commercial properties generally have different ranges, for example, prime locations might have cap rates around 5.75-6.5%, while industrial or retail properties have their own bands.
Summary Table for Rental Property Cap Rates:
Cap Rate Range| What It Usually Means
---|---
3.5% - 5%| Low risk, high-demand metro areas
4% - 6%| Stable, long-term holds in major markets
6% - 8%| Secondary markets, moderate risk
7% - 9%| Higher cash flow, balanced risk and reward
9%+| High risk, potentially problematic properties
Thus, a "good" cap rate depends on your investment goals, but for many investors in 2025, aiming for a cap rate in the 5% to 8% range for rental properties is reasonable, with adjustments based on location and property type. Lower cap rates can be justified by growth prospects, while higher cap rates need cautious evaluation due to risk factors. This aligns with current market insights reflecting cap rates influenced by interest rates, rent growth expectations, and asset quality in 2025. If you want a quick rule of thumb: a cap rate around 5-6% is decent in most urban areas, and closer to 7% or above might be what you look for in less expensive or higher-risk areas. Always consider risk, location, and long-term income potential when evaluating cap rates.
