What is a good cap rate for rental property?
There is no single "good" cap rate. In cash-flow markets like Memphis or Cleveland, 7% to 9% is common. In appreciation markets like Austin or Denver, 4% to 5% is considered normal. The right benchmark depends on your market, your strategy, and how much risk comes with that yield.
Ask ten investors what a good cap rate is and you will get eleven answers, all of them wrong. The real answer is that "good" is relative to the market, the asset, and the alternatives. A 9% cap in Memphis and a 4.5% cap in Austin can both be excellent buys for entirely different reasons. Pretending there is one magic number is how people either overpay in strong markets or chase yield into dying ones.
Cap rate ranges by city
These ranges reflect typical single-family rental cap rates as of 2025 to 2026, based on stabilized properties at realistic rents. Your specific deal will vary, but these give you a frame of reference for what the market is pricing.
| City / metro | Typical cap rate | Market type |
|---|---|---|
| Memphis, TN | 7% to 9% | High cash flow |
| Cleveland, OH | 8% to 10% | High cash flow |
| Indianapolis, IN | 7% to 8.5% | High cash flow |
| Birmingham, AL | 7% to 9% | High cash flow |
| Tampa, FL | 5.5% to 7% | Balanced |
| Phoenix, AZ | 5% to 6.5% | Balanced |
| Charlotte, NC | 5% to 6.5% | Balanced |
| San Antonio, TX | 5.5% to 7% | Balanced |
| Austin, TX | 4% to 5.5% | Appreciation |
| Denver, CO | 4% to 5% | Appreciation |
| Nashville, TN | 4.5% to 6% | Appreciation |
| San Diego, CA | 3.5% to 5% | Premium / coastal |
| Miami, FL | 4% to 5.5% | Premium / coastal |
Notice the pattern. Higher cap rates cluster in lower-cost, higher-yield markets where appreciation is slower. Lower cap rates show up where prices have been bid up by growth, migration, or scarcity. Neither is inherently better; they are different strategies.
What actually drives cap rate differences
Cap rate is price relative to income, so anything that moves price or income shifts it. Three forces dominate:
- Population and job growth. Markets adding people and jobs see prices climb faster than rents, compressing cap rates. Austin went from 6%+ cap rates a decade ago to 4% to 5% today, mostly on growth.
- Interest rates. Cap rates generally move with the cost of capital. When the 10-year Treasury yield sits at 4.5%, a 5% cap rate offers only 50 basis points of spread, which is thin by historical standards.
- Perceived risk. Higher-risk neighborhoods, older housing stock, or markets with volatile employers price at higher caps to compensate. The yield is the reward for the risk, not a free bonus.
The Treasury spread: a simple sanity check
One way experienced investors benchmark cap rates is against the 10-year US Treasury yield. Historically, single-family cap rates have traded at a 200 to 400 basis point spread over the Treasury. With Treasuries near 4.5% in mid-2026, that implies a "fair" cap rate somewhere around 6.5% to 8.5% for average-risk residential property.
A spread under 200 basis points means you are accepting very little premium for the work, risk, and illiquidity of owning a rental versus a government bond. That can make sense in a high-growth market where appreciation does the heavy lifting, but you should know you are making that trade.
When a high cap rate is a red flag
This is the part that trips up new investors chasing yield. A 10% cap rate is not always a deal. Sometimes it is the market telling you something.
- Declining population or employers. A shrinking city means rising vacancy, falling rents, and a cap rate that gets worse, not better.
- Deferred capital costs. A property with a failing roof and ancient HVAC will show a high cap rate on paper until you spend $25,000 that the cap rate did not account for.
- Inflated pro forma rent. If the listing assumes $1,800 but comparable properties rent at $1,400, the real cap rate is much lower.
- Concentrated risk. A single-industry town or a rough neighborhood might command a 10% cap, but one major employer closure or insurance hike can wipe out years of that yield.
The discipline is straightforward: whenever a cap rate looks unusually good, ask why the seller is not keeping it. The answer is usually the risk.
How to use cap rate benchmarks in practice
Cap rate is a comparison tool, not a decision tool. Here is how to put it to work:
- Compare within the same market. A 6.5% cap in Tampa is strong if the market average is 5.5%. That same 6.5% in Cleveland is below average. Context matters.
- Layer in your strategy. Cash-flow buyers want the highest sustainable cap rate they can find. Appreciation buyers accept a lower cap if growth and paydown carry the return. Neither is wrong.
- Then move to the real metrics. Cap rate shortlists. DSCR, cash-on-cash, and cash flow decide. A great cap rate on a deal that cannot finance at today's rates is academic.
Frequently asked questions
What cap rate should I look for in a rental property?
It depends on the market. In high cash-flow markets (Memphis, Cleveland, Indianapolis), 7% to 9% is typical. In balanced markets (Tampa, Phoenix, Charlotte), 5% to 7%. In appreciation markets (Austin, Denver), 4% to 5.5%. Compare against the local average, not a universal number.
Is a 10% cap rate good or bad?
It could be either. In a strong cash-flow market with stable demand, 10% is excellent. In most markets, a 10% cap rate signals elevated risk: a rough area, deferred maintenance, or declining demand. Always ask why the yield is that high before celebrating.
Why are cap rates lower in expensive cities?
Because prices have been bid up by growth, migration, and limited supply. Buyers in Austin or San Diego accept lower current yield because they expect appreciation and rent growth to make up the difference. The cap rate reflects the market's confidence in future value.
Do cap rates go up or down when interest rates rise?
Cap rates generally rise (expand) when interest rates rise, because buyers pay less for the same income when borrowing is more expensive. The relationship is not instant or exact, but over time, cap rates track the cost of capital.
Is cap rate or cash-on-cash return more important?
They answer different questions. Cap rate compares properties without financing. Cash-on-cash tells you what your invested cash earns after the loan. Use cap rate to shortlist, then cash-on-cash and DSCR to make the final call.
What is a good cap rate spread over Treasuries?
Historically, single-family rentals have traded at roughly 200 to 400 basis points above the 10-year Treasury yield. A spread below 200 means you are accepting thin compensation for the extra risk and work of direct ownership.