What Is a Good Cap Rate on a Rental Property? My Honest Take

Quick answer: A good cap rate on a rental property is usually somewhere between 5% and 10%, and the right number depends on the risk you're taking, not on some magic figure. Safer neighborhoods trade at lower cap rates. Rougher ones pay more because you're absorbing more trouble. Always compare a deal to similar rentals nearby.

A guy called me a while back, absolutely lit up about a duplex he found online. The listing said "9% CAP RATE" in all caps, like it was a blue ribbon at the fair.

I asked him one question. Does that number include a roof?

Long pause. The roof was original. To the house. And the house was not young.

That's cap rates in a nutshell. Everybody quotes them. Almost nobody agrees on what goes into them.

What Is a Good Cap Rate on a Rental Property?

Most of the time, a good cap rate on a rental property falls between 5% and 10%. That's the honest working range for regular long-term rentals — houses, duplexes, small multifamily. Not warehouses, not hotels, not whatever your cousin's podcast is selling.

But here's the part people skip. Cap rate isn't a grade. It's a price tag on risk.

• Low (roughly 4–5%): Stable street, easy tenants, strong resale. You make less on paper and sleep better at night.
• Middle (roughly 6–8%): The workhorse zone. Solid rent, real expenses, normal headaches.
• High (9% and up): More money on the spreadsheet, more phone calls in your actual life. Sometimes it's a gem. Sometimes the market is telling you something and you're not listening.

Nobody hands you a high cap rate out of kindness. You're getting paid extra for something. Your job is to find out what.

How Do You Actually Calculate It?

Net operating income divided by the purchase price. That's it. Napkin math you can do while your eggs cook.

Net operating income is the rent minus the operating costs — taxes, insurance, vacancy, repairs, management, lawn care, all of it. What it does not include is your mortgage payment. More on that in a minute, because it trips up almost everybody.

Say you're looking at a $300,000 house that rents for $2,000 a month. That's $24,000 a year coming in. I like to knock off about a third for the real cost of owning a rental, which leaves roughly $15,600. Divide that by $300,000 and you land right around 5.2%.

Is that good? Depends entirely on what the house next door is doing.

Why the Cap Rate in the Listing Is Usually Fiction

A seller's pro forma is a beautiful piece of creative writing. Real page-turner. Zero vacancy, zero turnover, a water heater that apparently lives forever, and management that costs nothing because the seller's brother-in-law does it for beer.

Here's what tends to get left out on purpose:

• Vacancy and turnover — even great tenants move eventually
• Capital stuff — roof, HVAC, water heater, that hundred-year-old sewer line
• Property management, whether you hire it or do it yourself for free at 11pm
• Insurance increases, which have spread faster than kudzu the last few years
• Rent that's "market" only if you squint really hard

Rebuild the number yourself. Every time. A cap rate you didn't calculate is just a rumor with a percent sign on it.

So What Is a Good Cap Rate on a Rental Property Around Chattanooga?

Around here, geography does most of the talking.

Downtown, the North Shore, the pretty pockets up on the ridges — those trade at lower cap rates. Buyers pay up for the location and the resale story. You're not buying a fat monthly return there. You're buying a house that'll be easy to rent and easy to sell.

Push out toward Ringgold, Fort Oglethorpe, Cleveland, or Dalton and the numbers usually get friendlier. Purchase prices come down faster than the rents do, so the math opens up. Steady employment out that way — the VW plant, the flooring industry, the hospitals — keeps working tenants in the pipeline.

Then there's the commute factor nobody puts in a spreadsheet. If a tenant has to fight Highway 153 twice a day to get to work, that shows up in how long they stay. Drive the route before you buy. Preferably at 5pm on a Tuesday, when you can really feel it.

Cap Rate Doesn't Care About Your Loan

This is the one that surprises people. Cap rate ignores financing completely. Two investors can buy the exact same duplex on the exact same day — one pays cash, one puts 25% down — and the cap rate is identical for both.

Cap rate measures the property. Cash-on-cash return measures your deal, with your down payment and your interest rate baked in.

So use cap rate to compare properties against each other. Use cash-on-cash to decide whether the deal is worth your actual money. Different tools, different jobs. Like a level and a tape measure.

When a Lower Cap Rate Is the Smarter Buy

Chasing the highest number on the page is how a lot of first-time investors end up owning a very educational property.

A 6% cap on a solid brick house near good schools can beat a 10% cap on a place where the tenants change with the seasons. Turnover eats returns quietly — lost rent, paint, carpet, cleaning, a leasing fee, and a couple weekends of your life you're never getting back.

Also worth saying plainly: if a deal only works when absolutely nothing breaks, that's not a deal. That's a dare.

How I'd Run the Numbers on Your Next One

Simple process. Works every time.

• Pull real rent comps, not the seller's hopes and dreams
• Get an actual insurance quote before you go under contract
• Look up the real tax bill, and remember it can change after a sale
• Budget vacancy and repairs even if you plan to swing the hammer yourself
• Compare the cap rate to two or three similar rentals in that same zip code
• Walk the property at night, not just at noon with the listing agent

Do that, and you'll know within an afternoon whether you're looking at a good cap rate on a rental property or a very expensive science project. If you want to start eyeballing what's out there, you can browse what's on the market right now and start plugging in numbers. I've written up more of the how-and-why over on the blog too.

Run your own math. The seller's spreadsheet has never once had to replace a water heater at two in the morning.