What Is a Good Cap Rate? Cap Rate and NOI Explained

Good cap rates

What is a good cap rate?

A good cap rate is one that pays you fairly for a property's risk and expected growth, not simply the highest number on offer. The cap rate is a property's net operating income (NOI) divided by its price. What counts as normal depends on the property type, the market and the measure used.

Nareit tracks implied cap rates for listed real estate investment trusts (REITs). In the second quarter of 2026 they ran from 5.0% for industrial to 7.4% for office. Private-market surveys use different methods and dates, so the table keeps them in their own column.

Each asset class guide has the detail behind its row. See net lease cap rates by tenant, industrial cap rates, self-storage cap rates and medical office cap rates. The guides to multifamily and grocery-anchored retail cover those rows. Data centers have no row here; see data center cap rates.

NOI first

What is NOI (net operating income) in real estate?

NOI (net operating income) is what a property earns from operations after its operating expenses and before loan payments, capital spending, depreciation and income taxes. MIT's real estate finance course builds it in four lines. Potential gross income, minus a vacancy allowance, plus other income such as parking, equals effective gross income. Subtract operating expenses and you have NOI.

What does NOI include and leave out?

NOI includes the costs of running the building every year and leaves out the costs of owning, financing and upgrading it. MIT's course lists both sides:

Counted in NOI

• Rent and other income, minus vacancy and credit loss.
• Property taxes, insurance, utilities, and maintenance and repairs.
• Management, which must be counted "even if self-managed."

Left out of NOI

• Debt service: NOI comes before any mortgage payment.
• Capital spending: tenant improvements, leasing commissions, major repairs, new major equipment and remodeling.
• Depreciation and income taxes.

Some analysts subtract a replacement reserve before NOI, which lowers it. Ask which method a sponsor uses; this guide keeps reserves below NOI, as MIT does.

The formula

How do you calculate a cap rate?

To calculate a cap rate, build NOI from the property's income and expenses, then divide it by the purchase price or current value. The full calculation on one property:

Higher or lower

Is a higher cap rate better or worse?

A higher cap rate is better for a buyer only if its income is as safe, and as likely to grow, as a lower one's. Most of the time the market prices in a reason.

MIT's course puts it as a formula: expected total return is roughly the cap rate plus expected growth. So a low cap rate can mean strong growth or low risk rather than an expensive property.

NCREIF, the institutional property index body, gives an example of two identical office buildings, one bought at a 12% cap rate and one at 2%. The 12% building had leases about to reset lower. The 2% building was under-leased, with rents set to rise. "Someone without knowledge of the situation may think the 12% cap rate was a steal and the 2% cap rate was overpriced."

Tenant credit shows up the same way in net lease prices. Boulder Group's third-quarter 2026 asking cap rates ranged from 4.50% for Chick-fil-A ground leases to 8.20% for Walgreens and 8.75% for Family Dollar. A higher cap rate on a net lease usually means the market sees more risk in the tenant, the remaining lease term or the location.

Rates and cap rates

Why do cap rates move with interest rates?

Cap rates move with interest rates because buyers compare a property's income with what bonds pay and what loans cost. When either rises, buyers pay less for each dollar of NOI. The link is real but loose. NCREIF's forecasting model ties cap rates to the 10-year Treasury, the spread on Baa corporate bonds and the VIX volatility index.

The spread is thin in 2026. Nareit's all-REIT implied cap rate was 5.7% in the second quarter, and the 10-year Treasury yielded 5.09% on October 16, 2026 (FRED). Relli computed a gap of about 0.6 points from those figures, which have different dates. The thin gap means buyers are counting on NOI growth to earn more than a Treasury bond.

Net lease shows the pressure first because its rents are fixed. Boulder Group's average net lease asking cap rate rose 10 basis points in the third quarter of 2026 to 6.92%. That was "the highest level reached in over a decade," according to Boulder. Boulder also notes that permanent loans are now "generally priced above net lease cap rates in most instances."

Where are cap rates heading in 2026?

Most investors expected cap rates to hold steady in the second half of 2026, and more than before expected them to rise. That is the read from CBRE's H1 2026 cap rate survey, published August 12, 2026. About 60% of respondents expected no change. Infill multifamily was the most bearish group, and neighborhood retail had compressed the most in the first half.

CBRE's average cap rate across property types was 6.3% in Q2 2026, against 6.0% a year earlier. Relli does not forecast cap rates; these are dated survey results.

The exit cap

Going-in vs exit cap rate: why does the exit assumption matter?

The exit cap rate matters because it sets the sale price, which drives most of a projected profit. The going-in cap rate is NOI divided by today's price. The exit cap rate is the rate a sponsor assumes the next buyer will pay.

An exit cap below the going-in rate is a bet that prices will rise. Ask the sponsor what the return looks like at exit caps half a point and a full point higher.

The loan magnifies the swing for investors. A 7.5% exit cap leaves the property's price almost flat, but the equity, which carries all of the change, barely grows.

For investors

Cap rate vs cash-on-cash return: what is the difference?

A cap rate measures NOI against price before any loan, while cash-on-cash return measures the owners' cash after the loan against their equity. The owners' cash is what is left after capital spending and loan payments. On the same $10,000,000 property:

1. NOI is $650,000, a 6.50% cap rate.
2. Subtract a $50,000 capital reserve and $360,000 of interest on the $6,000,000 loan at 6%.
3. That leaves $240,000 for the owners, and $240,000 / $4,000,000 of equity = 6.00% cash-on-cash.

Here the loan costs about as much as the property yields after its reserve, so debt does not lift the cash return. The guide to IRR, equity multiple and cash-on-cash return shows how leverage changes the full return over a hold.

How should a passive investor use cap rates?

A passive investor should use the cap rate as a starting question about price and risk, not as a verdict on the deal. Five checks turn it into something useful:

1. Which NOI is it: the last twelve months, next year's projection or a stabilized figure? NCREIF warns these can give "two very different cap rate numbers," and the private placement memorandum (PPM) guide covers trailing vs pro forma NOI.
2. How does the going-in cap rate compare with a named, dated source for that property type and market?
3. What exit cap rate does the plan assume, and what happens at 0.5 and 1 point higher?
4. Does NOI include a management fee, and where does the capital reserve sit?
5. How much will the property really spend on capital items? MIT puts long-run capital spending for most commercial property at "at least 10% to 20% of the NOI." Cash after capital spending therefore sits below the cap rate.

Short answers

Is a 10% cap rate good, and does a cap rate include the mortgage?