Tap to get financing
Multifamily Loans
Property Types
MultifamilyHealth Care & Senior LivingStudent HousingAffordable HousingMobile Home ParkOffice, Retail & More
Loan Options
Fannie MaeFreddie MacConstruction LoansLoans Under $1MFreddie Mac SBLFHA/HUD Multifamily LoansForeign National LoansCMBSBank LoansLife CompaniesBridge LoansHard MoneySoft MoneyMezzanine FinancingCrowdfundingSBA 504 LoansMezzanine Construction LoansUSDA 538 LoansFix and Flip LoansFractured Condo LoansDSCR Loans
Resources
BlogLoan DocsForms and TemplatesRatesLingoVideo LibraryMultifamily For SaleCommercial MortgagesFrequently Asked QuestionsBeginner's Guide
Calculators
Multifamily Mortgage CalculatorCap Rate CalculatorNOI CalculatorDSCR CalculatorLTV CalculatorDebt Yield CalculatorCash on Cash Return CalculatorYield Maintenance CalculatorIRR Calculator
About
About UsLeadershipTeamContactAffiliate Program (Coming Soon)We're Hiring
Get financing
Was This Article Helpful?
Newly Published
Jan 27 at Multifamily Loans
4 Steps to Increase Your Apartment Building's Occupancy
Jan 24 at Multifamily Loans
The 4 Best Multifamily Loans in 2023
Jan 24 at Multifamily Loans
Multifamily Minute Reader Reflections: The Best Approach for Investing in 2023
Explore the Janover Network
Jan 26 at Commercial Real Estate Loans
How Does ChatGPT Work With Commercial Real Estate?
Jan 25 at Commercial Real Estate Loans
Capital Gains Taxes in Commercial Real Estate
Jan 18 at Commercial Real Estate Loans
The Top 10 Markets to Buy Industrial Real Estate in 2023
Multifamily Finance Blog
Last updated on Dec 12, 2022
6 min read
by Jeff Hamann

What Is a Good Cap Rate for Multifamily Properties?

Although an imperfect tool, understanding cap rates for your apartment investment is a key way of measuring potential upsides and risks.

Apply for a loan in minutes and get multiple quotes today → Get Quotes

In this article:
  1. What Is a Cap Rate?
  2. Why Are Cap Rates Important?
  3. What Is a Good Cap Rate for an Apartment Building?
  4. Are Cap Rates Different for Different Types of Multifamily Investments?
  5. Cap Rates for Class A Properties
  6. What Does a High Cap Rate Mean?
  7. What Does a Low Cap Rate Mean?
  8. How Do Interest Rates Impact Cap Rates?
  9. How Can I Calculate My Cap Rate?
  10. Conclusion
  11. Get Financing

What Is a Cap Rate?

A cap rate, or capitalization rate, is a way of measuring the return on investment (ROI) of a real estate investment. It is the ratio of the net operating income (NOI) of a property to the price of the property. The cap rate is calculated by dividing the NOI by the price of the property and multiplying by 100, resulting in a percentage rate. For example, if the NOI of a property is $100,000 and the price of the property is $1 million, the resulting cap rate is 10%.

Why Are Cap Rates Important?

Cap rates are important because they provide investors with an easy way to compare the returns of different real estate investments. If a property has a higher cap rate, it means that the investor is earning a higher return on their investment.

In the multifamily housing market, cap rates are an important way to compare properties and make decisions about which properties to invest in. That said, cap rates are only one tool — it is crucial for investors to consider other metrics and aspects of any potential investment.

What Is a Good Cap Rate for an Apartment Building?

While there’s no easy or single answer to this question, there are some considerations to be aware of. Every investor has a different risk appetite for their investments, and while multifamily assets with higher cap rates have, on the surface, a potential greater return, they also generally carry more risk.

Broadly speaking, when investing in an apartment building, investors should aim for a cap rate that is higher than the average for their market. However, if it’s too high, that may be a sign of other issues that could impact the investment later on, such as rents out of alignment with the market or deferred maintenance issues.

Are Cap Rates Different for Different Types of Multifamily Investments?

Yes — the cap rates for different types of multifamily properties can vary significantly. For example, a Class A property typically has a lower cap rate than a Class B property. This is because these properties require a greater capital investment. While rents are also (usually) higher, overall net operating income tends to make up a relatively smaller portion of the investment cost — meaning a lower capitalization rate.

That said, multifamily cap rates tend to be the lowest across any commercial real estate sector, though rates in industrial real estate investment tend to be similarly low in many markets.

Cap Rates for Class A Properties

The table below utilizes data provided by CBRE in its latest cap rate survey, which is published twice annually. The data is valid as of May 2022 and looks at a spectrum of Class A properties across major U.S. markets.

Multifamily Investment Type

Cap Rate

Stabilized, Infill

3% to 5.25%

Value-Add, Infill

3.25% to 7.5%

Stabilized, Suburban

3% to 5.5%

Value-Add, Suburban

3.25% to 7.5%

As you can see, there is some variation in cap rates depending on whether or not a property is a stabilized asset or is a value-add play. Value-add investments tend to be riskier, and this is reflected in the capitalization rate. Similarly, suburban properties often have higher associated cap rates than infill communities, though this spread has been less pronounced in recent years.

There is also a significant difference depending on the market. For example, cap rates range from 4.75% to 7.5% for multifamily assets in Philadelphia, while Austin’s rates fall between 3.25% and 3.75%.

What Does a High Cap Rate Mean?

A high cap rate may indicate a good investment opportunity. A high cap rate means the property is generating a higher return on the investor’s investment. While this can be attractive, it is important to consider the potential risks. 

So what’s the potential risk? A high cap rate could indicate that the property is in an area with low rental prices or that the property itself has deferred maintenance issues that could affect its long-term value. Thus, just because you find an investment property with a potentially high cap rate, don’t immediately assume that it’s a great deal. Other factors must always be considered.

What Does a Low Cap Rate Mean?

A low cap rate for a multifamily investment is a sign of a strong market and can be a great opportunity for potential investors. A low cap rate means that the net operating income is higher relative to the purchase price, which means that the investment is more profitable. Low cap rates are often associated with strong markets as they indicate that the demand for multifamily investments is high and the market is healthy. 

Low cap rates can be beneficial for multifamily investors as they can help to reduce the amount of risk associated with an investment. The lower the cap rate, the lower the risk, as it means that the property is generating more income and is likely to remain profitable for a longer period of time. Low cap rates also make it easier for investors to secure financing for their multifamily investments, as lenders are more likely to view the investment as a lower risk. 

However, low cap rates can also be a sign of oversupply in the market, which can be a challenge for potential investors. If there is an oversupply of properties in the market, it can lead to lower rents and higher vacancy rates, which can make it more difficult to generate a profit from an investment. This is why it is important for investors to do their research and assess the market before investing in a multifamily property with a low cap rate.

How Do Interest Rates Impact Cap Rates?

Not everyone agrees that there’s a direct causal link, but multifamily capitalization rates tend to increase as the cost of capital increases. It makes sense when you think about it: If borrowing becomes more expensive, this will necessarily impact property values. If a property’s value decreases with all other factors held the same — rents, operational costs, and so on — the cap rate will increase for that investment.

How Can I Calculate My Cap Rate?

Calculating a cap rate for an investment couldn't be simpler: Just use our cap rate calculator below. All you need to provide is your property or investment's market value or purchase price along with its net operating income.

Conclusion

Cap rates are an important way to compare the returns of different real estate investments. When investing in multifamily properties, investors should consider the cap rate of the property and compare it to other properties in the same class. Generally, properties with higher cap rates are considered to be better investments.

In this article:
  1. What Is a Cap Rate?
  2. Why Are Cap Rates Important?
  3. What Is a Good Cap Rate for an Apartment Building?
  4. Are Cap Rates Different for Different Types of Multifamily Investments?
  5. Cap Rates for Class A Properties
  6. What Does a High Cap Rate Mean?
  7. What Does a Low Cap Rate Mean?
  8. How Do Interest Rates Impact Cap Rates?
  9. How Can I Calculate My Cap Rate?
  10. Conclusion
  11. Get Financing

Getting commercial property financing should be easy.⁠ Now it is.

Click below for a free, no obligation quote and to learn more about your loan options.

Get financing →
Janover logo

Multifamily Loans is a Janover company. Please visit some of our family of sites at: Multifamily Loans, Multifamily Today, Commercial Real Estate Loans, SBA7a Loans, CMBS Loans, Apartment Loans, HUD Loans, HUD 221d4 Loan, HUD 232 Loan, HUD 223f Loan, HUD 223a7 Loan, SBA Express Loans, SBA 504 Loans, and OpportunityZones Help.

Janover Inc.

6401 Congress Ave
Ste 250
Boca Raton FL 33487

hello@multifamily.loans

Site Information

Privacy Policy
Terms of Use

This website is owned by a private company that offers business advice, information and other services related to multifamily, commercial real estate, and business financing. We have no affiliation with any government agency and are not a lender. We are a technology company that uses software and experience to bring lenders and borrowers together. By using this website, you agree to our use of cookies, our Terms of Use and our Privacy Policy. We use cookies to provide you with a great experience and to help our website run effectively.

Freddie Mac® and Optigo® are registered trademarks of Freddie Mac. Fannie Mae® is a registered trademark of Fannie Mae. We are not affiliated with the Department of Housing and Urban Development (HUD), Federal Housing Administration (FHA), Freddie Mac or Fannie Mae.

Copyright © 2022 Janover Inc. All rights reserved.