Capitalization rate — the key metric for evaluating income-producing real estate investments.
Cap rate represents the return you'd earn if you bought the property with all cash. Higher cap rate = higher return but usually higher risk. Lower cap rate = lower return but typically safer/prime location.
| Type | Cap Rate Range |
|---|---|
| Class A Multifamily (Urban) | 4.0% – 5.5% |
| Class B Multifamily | 5.5% – 7.0% |
| Single Family Rental | 5.0% – 8.0% |
| Office | 6.0% – 9.0% |
| Retail (NNN) | 5.5% – 7.5% |
| Industrial/Warehouse | 5.0% – 7.0% |
Cap rate only measures cash-on-cash yield without leverage. With a mortgage, your actual cash-on-cash return on equity can be much higher (or lower) than the cap rate. Also doesn't include appreciation.