A "good" cap rate is not a single number. In today's market: 4–6% is normal for coastal / high-appreciation metros, 6–8% is normal for stable Midwest markets, and 8–10%+ is normal for cash-flow-focused workforce housing. Higher cap rates almost always mean higher risk — a 12% cap on paper often reflects a challenging neighborhood, aging building, high turnover, or tenant risk that isn't priced into the number. The best cap rate is the one that clears your own return threshold after accounting for the specific risk profile of the deal.
Cap rate refresher (30 seconds)
Cap Rate = Net Operating Income ÷ Purchase Price
NOI is gross rent minus operating expenses (taxes, insurance, vacancy, repairs, CapEx, property management) BEFORE debt service. Cap rate is the unlevered yield of the property — what it produces annually as a percentage of purchase price, regardless of how you finance it.
A 7% cap rate means the property produces 7% of the purchase price in annual net income. Same $100k of NOI on a $1M property (10% cap) vs a $2M property (5% cap) — the higher-cap deal produces more per dollar deployed.
Cap rate bands by market type
Coastal / high-appreciation metros (4–6%)
San Francisco, Seattle, NYC boroughs, Boston, Los Angeles, San Diego, DC metro. Cap rates here are compressed because buyers are pricing in expected appreciation, not just cash flow. A 5% cap in the Bay Area is normal — the return is coming from equity growth, not monthly rent. If you underwrite these markets on cash flow alone, you'll pass on everything.
Stable secondary metros (6–8%)
Chicago's north side, Denver, Nashville, Charlotte, Austin, Portland, most of Twin Cities. Enough tenant demand and appreciation history to support moderate cap rates, but not so hot that cash flow disappears entirely. A 6.5–7.5% cap on a north-side Chicago 2-flat in stable neighborhoods (Logan Square, Andersonville, Rogers Park) is typical.
Cash-flow-focused Midwest / Rust Belt (8–10%)
Chicago south side, Milwaukee, Cleveland, Detroit, Indianapolis, Kansas City, Memphis, Birmingham. Lower price-per-door and cash-flow-driven markets. A 9% cap on a South Shore Chicago 3-flat is common. Trade-off: less appreciation, more tenant management overhead, thinner exit market when you sell.
Distressed / speculative (10%+)
Highest-risk neighborhoods, older buildings with deferred maintenance, or markets with population outflow. A 14% cap can absolutely exist, but the reason it's 14% is usually visible if you look — the neighborhood is going the wrong direction, the building needs $80k in mechanical work, or the current tenants aren't paying. High cap rates are always a question, not an answer.
Cap rate bands by property class
Even within a single market, different property classes trade at different cap rates because they attract different tenant profiles and different investor buyers.
- Class A (newer, well-maintained, high-income neighborhoods): 4–6% cap. Trophy buyers pay for stability.
- Class B (older but well-maintained, middle-income neighborhoods): 6–8% cap. Sweet spot for most individual investors.
- Class C (older, some deferred maintenance, working-class neighborhoods): 8–10% cap. Higher yield, more active management.
- Class D (heavy deferred maintenance, challenged neighborhoods, high turnover): 10%+ cap. Specialist strategy — not for first-time investors.
What "good" actually means for YOU
Cap rate is a comparison tool, not a scoring tool. "Is 7% good?" isn't answerable in isolation. The right questions:
- Is it above your minimum threshold? Most individual investors set a personal floor — 6%, 7%, 8% — below which they don't consider a deal. The floor should reflect what other investments produce (Treasuries, index funds) plus a risk premium for real estate work.
- Is it above the market band for the property class? A 6% cap on a South Shore 3-flat is below market and probably means the seller is optimistic. A 6% cap on a Lincoln Park 2-flat is above market and probably a good buy.
- Does the cash-on-cash also clear your bar? Cap rate ignores financing. If your loan is expensive (7%+ interest, 30-year investor DSCR), even a 9% cap can produce mediocre cash-on-cash. Both numbers matter.
- Is the NOI real? Cap rate uses the seller's NOI, which is often optimistic. Rerun with realistic vacancy (7–10% not 3%), realistic maintenance (10–15% not 5%), and see what the cap becomes. Adjusted cap rate is the honest one.
The "high cap rate trap"
Beginner investors often filter listings by cap rate — highest at the top — and get excited about 12–15% caps in Detroit or Baltimore or St. Louis. The trap is that those cap rates reflect risk the underwriting spreadsheet doesn't capture:
- Tenant collection challenges (nominal rent $1,200; actual collected $850 after losses)
- High turnover and unit-refurb costs between tenants
- Property tax uncertainty (Cook County reassessments; Detroit's system-wide catch-up)
- Insurance issues in certain ZIP codes
- Thin exit market when you want to sell
The corollary: if a deal shows a cap rate meaningfully above the market band, ask what's wrong. Sometimes the answer is "nothing, it's a real find." More often the answer is one of the above.
How Prop-Folio surfaces cap rate
Every Buy & Hold and BRRRR analysis in Prop-Folio shows cap rate as one of the primary metrics. The Deal Score factors cap rate against the local market band automatically — a 7% cap in South Shore scores differently than a 7% cap in Lincoln Park, because the app knows what "market" looks like for each neighborhood tier. That's the honest way to answer "is this a good cap rate?" — not against a universal number, but against comparable properties in the same market.
Related: Cap rate vs cash-on-cash vs DSCR · What is a Deal Score? · Chicago BRRRR underwriting