What Is a Good Cap Rate for Rental Property?

Last reviewed April 2026

"What's a good cap rate?" is one of the questions I get asked most often, and the honest answer has changed dramatically over the last few years. The textbook answer most articles give you is some fixed range like "6 to 8 percent." That answer is wrong, or at least incomplete. The right answer depends entirely on what mortgage money costs right now and what risk-free alternatives are paying. Let's dig into how I actually think about it today.

Cap Rate Is Relative, Not Absolute

Cap rate doesn't exist in a vacuum. It only matters in relation to two things: the risk-free rate (basically what you can get on Treasuries) and the cost of borrowing. When 10-year Treasuries pay 4 to 5 percent with zero risk and zero work, a 5 percent cap rate on a property that comes with tenants, repairs, vacancy risk, and 80 hours a year of management headaches is not a good deal. You're getting paid almost nothing for taking on enormous additional risk. That's not investing, that's a hobby.

So the first question I ask is: what's the spread between the cap rate and what I could get risk-free? In a healthy environment for rental property investing, I want to see at least 200 to 300 basis points of spread above the 10-year Treasury. That's the floor for me to even consider a deal.

Then You Have to Layer in Financing

The second question is whether you're financing the deal. If you're paying cash, the cap rate is essentially your return (plus or minus appreciation and tax benefits). If you're financing, you have to look at whether the cap rate is high enough to overcome the cost of debt. This is the part most new investors miss. Let me show you why.

Take a $250,000 property with a 6 percent cap rate. NOI is $15,000. Now finance it 75 percent loan-to-value at the current 30-year fixed mortgage rate, which according to FRED is currently 6.37%. With that rate and amortization, your annual debt service is roughly equivalent to or higher than your NOI. You can have positive cash flow on a 6 percent cap rate when mortgages are 4 percent. You'll have negative cash flow when mortgages are 6.37%. Same property, same tenant, same rent. Different math, because the cost of money changed.

So my second test is: is the cap rate higher than my mortgage rate? If yes, leverage is helping. If no, leverage is hurting. Right now I want at least 100 basis points of positive leverage, meaning I want to see the cap rate at least 1 percent above my mortgage rate before I'll consider financing the deal. With current mortgage rates at 6.37%, that puts me at about 7.4% as a minimum cap rate for any leveraged purchase, and I'd really prefer to see it 200 basis points above, around 8.4%.

The Framework I Actually Use

Putting it all together, here's the rough framework I'm using right now:

• Below current mortgage rate (6.37% today): Pass on financing. Cash deal only, and only if you have a strong appreciation thesis.
• Mortgage rate to mortgage rate plus 1 (currently 6.37% to 7.4%): Tight. The math barely works even after a healthy down payment.
• Mortgage rate plus 1 to plus 2 (currently 7.4% to 8.4%): Financeable. Run the full numbers carefully.
• Mortgage rate plus 2 and above (currently above 8.4%): Now we're talking. This is where I focus my buying.

The key insight is that this framework moves with rates. When mortgages were 3 percent, that bottom tier was a 5 percent cap rate. When mortgages drop to 5 percent, the bottom tier becomes 7 percent. When mortgages go to 8 percent, the bottom tier is 10 percent. The relationship is what matters, not the absolute number.

What About Markets Where Nothing Hits the Floor?

This is the legitimate counter-argument, and I hear it all the time. In a lot of strong appreciation markets, almost nothing trades at the floor cap rate I'd want today. The properties are priced for appreciation, not yield. If you're buying in those markets, you're betting on price growth covering for the weak current return. That can absolutely work over a 10-year hold, but you have to know that's the bet you're making, and you have to be able to feed the property out of your own pocket if things get tight. I don't recommend that approach for newer investors.

What I tell people who can't find acceptable cap rates locally is: look further out. The deals are out there, they're just not in the markets that get all the attention. Secondary cities in the Midwest and parts of the Southeast still have inventory that meets the rate-plus-200 threshold. The trade-off is harder property management and lower appreciation, but the cash flow math works.

Run the Numbers Yourself

Cap rate is a starting point, not an ending point. The full picture includes Cash on Cash Return, DSCR, NOI, and a 5-year ROI projection that accounts for appreciation and principal paydown. That's what the LandlordCalc rental property calculator shows you all on one screen, and it pulls the same live FRED rate data this article does, so the targets you see reflect today's environment, not assumptions from a year ago.

The bottom line: there is no universal "good cap rate." There's only the cap rate that makes sense for today's interest rates, today's risk-free alternatives, and your specific investment strategy. Run the numbers, don't trust rules of thumb that were written when money was cheap.

Frequently Asked Questions

What is considered a good cap rate?

There is no universal answer because cap rate benchmarks move with mortgage rates. As a rule of thumb, I look for a cap rate at least 200 basis points above the prevailing 30-year mortgage rate before I'll get excited about a leveraged deal. So with 6.37% mortgage rates, my floor is around 8.4%. With 4% mortgages it would be 6%. The relationship is what matters, not the absolute number.

Why do cap rate benchmarks change with interest rates?

Because the cost of borrowing affects what's profitable. If a property has a 6% cap rate but your mortgage costs 7%, you're losing money on every dollar you borrowed. In low-rate environments, lower cap rates work. In high-rate environments, you need higher cap rates to overcome borrowing costs.

Is a 10% cap rate always better than a 6% cap rate?

Not on a risk-adjusted basis. A 10% cap rate often comes from properties in lower-quality neighborhoods with higher tenant risk, more deferred maintenance, and weaker appreciation. A 6% cap rate in a Class A area can be the better long-term hold despite the lower current yield.