What Is a Good Cap Rate for a Commercial Property?

Spend ten minutes around commercial real estate investors and someone will mention a cap rate.

“It’s trading at a seven cap.”

“Too low. I want an eight.”

It sounds like insider language. It isn’t. A cap rate is one simple division problem, and once you understand it, you can size up almost any income property in minutes.

The harder question is what number counts as “good.” That’s where most explanations get vague. Let’s not.

The Short Answer

A cap rate (capitalization rate) is a property’s net operating income divided by its price.

Cap rate = Net operating income ÷ Purchase price

There’s no single “good” cap rate. It depends on the property type, the location, and the risk. As a rough national anchor, CBRE’s H1 2026 survey put the all-property cap rate at roughly 6.6%, essentially unchanged from late 2025, according to CRE Daily. 

A good cap rate is one that fairly pays you for the risk of that specific building. Sometimes that’s 5%. Sometimes it’s 10%.

How Do You Calculate a Cap Rate?

Two steps.

Step 1: Find the net operating income (NOI). That’s the rent the building collects, minus the costs of running it: property taxes, insurance, maintenance, management, and an allowance for vacancy. It doesn’t include your mortgage payment.

Step 2: Divide NOI by the price.

Math time (illustrative):

A first-time investor is looking at a $900,000 three-tenant retail building.

• Annual rent collected: $90,000
• Operating expenses (taxes, insurance, maintenance, management, vacancy): $27,000
• NOI: $90,000 − $27,000 = $63,000
• Cap rate: $63,000 ÷ $900,000 = 7.0%

That’s it. A 7% cap means the building’s net income equals 7% of its price each year, before any financing.

You can flip the formula to estimate value. If similar buildings nearby trade at a 6.6% cap:

• $63,000 ÷ 0.066 = about $954,500

At $900,000, this building is priced below what the market’s cap rate would suggest. That’s worth a closer look, and worth asking why.

Why Is a Higher Cap Rate Not Always Better?

A higher cap rate means more income per dollar of price. Sounds better. But cap rates are high for a reason: the market sees more risk.

The spread is huge. In CBRE’s H1 2026 survey, stabilized New York City multifamily traded around 5% to 5.5%, while Class A suburban office in markets like Chicago widened to 10% to 12.5%. 

That office building isn’t twice as good an investment. Buyers demand twice the return because they’re nervous about vacancies, tenant demand, and future rents.

So read cap rates like this:

• Lower cap rate: more expensive per dollar of income, but usually more stable. Strong location, reliable tenants, high buyer demand.
• Higher cap rate: cheaper per dollar of income, but usually more risk. Weaker location, shorter leases, a struggling property type, or a building that needs work.

The cap rate is the price of risk. A bargain cap rate on a risky building isn’t a bargain.

Cap Rate vs. the 7% Rule: What’s the Difference?

If you’ve read our breakdown of the 7% rule, these may sound similar. They’re not.

• The 7% rule uses gross rent, before any expenses. It’s a quick filter.
• The cap rate uses net income, after operating expenses. It’s the real measure.

Same $900,000 building:

• Gross rent ÷ price: $90,000 ÷ $900,000 = 10%. Easily passes the 7% rule.
• NOI ÷ price: $63,000 ÷ $900,000 = 7.0%. That’s the cap rate.

Three points of difference, all eaten by expenses. Use the 7% rule to screen fast. Use the cap rate before you make an offer.

What Makes a Cap Rate “Good” for You?

Check four things:

• Compare it to local sales of the same property type. A 7% cap on retail means something different from a 7% cap on industrial, and a different thing again in another city.
• Compare it to your borrowing cost. If your loan rate is higher than the cap rate, borrowed money earns less than it costs. A 7.0% cap with a 7.25% loan rate means leverage works against you.
• Check the tenants and leases. Long leases with solid tenants make a lower cap rate easier to accept. Leases that expire next year make a higher one riskier than it looks.
• Verify the NOI. Sellers often quote “pro forma” income: what the building could earn, not what it does. If the seller says NOI is $70,000, the cap rate looks like 7.8%. If the real NOI is $63,000, it’s 7.0%. Always ask for actual numbers.

A good cap rate is accurate, fits the local market, and beats what you’re paying to borrow.

Recap

• Cap rate = net operating income ÷ purchase price.
• CBRE’s H1 2026 all-property cap rate sat around 6.6%, but it ranges widely by property type and market.
• Higher cap rates mean more income per dollar, and usually more risk.
• The 7% rule uses gross rent. Cap rate uses net income. Expenses are the difference.
• A good cap rate matches local comps, beats your loan rate, and is built on real numbers.

Final Word

A cap rate won’t tell you whether to buy a building.

It tells you how the market is pricing that building’s risk, and whether this deal is priced the same way.

Learn to calculate it in your head. Then learn to ask why it’s the number it is. That second question is where the real analysis starts.

Browse commercial listings at hutfin.com.