What is a good cap rate? For rental property, a capitalisation (cap) rate of roughly 5–10% is generally considered good, with many investors targeting around 8%. A higher cap rate means more income relative to price — but often more risk. What's 'good' depends on the market and property type.
The cap rate is a property's annual net operating income as a percentage of its value. It lets investors compare income-producing properties on a like-for-like basis, independent of financing.
Cap rate ranges
| Cap rate | Rating | What it means |
|---|---|---|
| 8–10%+ | High | Strong income; often higher-risk areas. |
| 5–8% | Good | A common, healthy target for many markets. |
| 3–5% | Low | Prime, low-risk locations; price-growth play. |
| Below 3% | Very low | Income barely covers costs; review carefully. |
What affects your cap rate
- Net operating income — higher income lifts the cap rate
- Property price — a lower price raises it
- Location — prime areas trade at lower cap rates
- Risk — higher cap rates often signal higher risk
- Vacancy and expenses — they reduce net income
How to improve it
- Use realistic income and full operating expenses
- Compare cap rates within the same market
- Don't chase a high cap rate without checking risk
- Weigh income (cap rate) against expected price growth
Work out your own numbers — the Cap Rate Calculator does it instantly, for free, with the formula and a worked example built in.
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