Is a 6% cap rate good?
It depends on what you compare it with. A 6% cap rate is reasonable for a stable property in a strong location if similar properties sell near 6%. It is weak if similar buildings trade at 7% or if your mortgage costs more than 6%, because borrowing would then lower your cash return. Judge it against the market, the risk and your financing.
Three comparisons that answer the question
| Compare with | If 6% is above it | If 6% is below it |
|---|---|---|
| Cap rates of similar recent sales | You may be buying income cheaply - or missing a risk | You are paying a premium price for the income |
| Your mortgage constant (annual payment ÷ loan) | Borrowing raises your cash-on-cash return | Borrowing lowers it (negative leverage) |
| The risk of the income | Fair pay for a weaker location or tenant | Justified only by stability or expected growth |
Worked example
Cap rate on a $400,000 rental
Illustrative example - round numbers, not current market data. Calculated with Reaixo's calculator engines.
Assumptions
- Purchase price
- $400,000
- Market rent
- $3,000 a month
- Vacancy and credit loss
- 5%
- Operating expenses (taxes, insurance, repairs, management)
- $10,200 a year
| Step | Calculation | Result |
|---|---|---|
| 1. Gross potential rent | $3,000 × 12 | $36,000 |
| 2. Less vacancy | $36,000 × 5% | $1,800 |
| 3. Effective gross income | $36,000 − $1,800 | $34,200 |
| 4. Net operating income | $34,200 − $10,200 | $24,000 |
| 5. Cap rate | $24,000 ÷ $400,000 × 100 | 6.00% |
Cap rate: 6.00%. Before any mortgage, the property earns 6.00% of its price a year from operations. A buyer who paid $450,000 for the same income would earn only 5.33%.
What this calculation leaves out
- Mortgage payments are not in NOI, so cap rate says nothing about cash flow after financing.
- Capital expenditures such as a new roof are usually shown below NOI; a property with a large backlog can look better than it is.
- The result is only as good as the rent, vacancy and expense estimates. Use actual operating statements when you can.
Check the NOI behind the 6%
A cap rate is only as honest as the NOI. Sellers sometimes quote a cap rate on full rent with no vacancy, below-market taxes that will reset after a sale, or no management fee. Recalculate NOI with realistic vacancy, the tax bill you will pay and every operating expense before comparing.
- Use achievable rent, not the hoped-for rent.
- Budget vacancy and a capital reserve.
- Use the property tax bill after purchase, not the seller's.
Frequently asked questions
What is a good cap rate for a rental property?
There is no single number. Compare the cap rate with similar properties in the same market and with your borrowing cost.
Is a higher cap rate better?
Not always. A higher cap rate pays more income per dollar of price but often reflects more risk, older buildings or weaker locations.
Why does my mortgage rate matter to the cap rate?
Because borrowing helps only when the property yields more than the loan costs. If the mortgage constant is above the cap rate, leverage reduces your cash return.
Calculators and guides
Recommended next step
Rebuild the NOI with your own assumptions and see the cap rate it supports.
Calculate a property's cap rate →Sources and review
No regulator defines these terms; the page follows common industry practice and labels rules of thumb as such.
Where this applies: Not regulated. Investment ratios and budgeting allowances are industry conventions and rules of thumb, not requirements.
Last reviewed: · Updated:
Worked examples use illustrative round numbers, not current market data. Rates, limits and program rules change - confirm current figures with your lender or a qualified professional.
General educational information, not financial, legal, tax or real estate advice. Rules vary by loan program, transaction and location - verify important decisions with qualified professionals.