What is a good cap rate for commercial property?

If you're looking at buying commercial property, one of the first questions you might ask is: What is a good cap rate for commercial property?

The cap rate shows how much income a property earns compared to what it costs, and it's one of the fastest ways to judge whether a deal is worth a closer look.

In this guide, we'll cover what a cap rate is, how to work one out, what counts as a strong number, and the factors that move it up or down.

We'll also introduce the Wise account, which allows you to send, spend, and receive your money across the globe in over 40 currencies – all at the fair mid-market rate.

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What is a cap rate?

A cap rate, short for capitalization rate, is the return you'd expect to earn on a property based on the income it brings in. It's shown as a percentage.

A higher cap rate usually means more income relative to the purchase price, but it can also point to higher risk. A lower cap rate tends to signal a safer, more stable property, often in a sought-after location.

Investors use cap rates as a quick way to compare one property against another without getting lost in the details.

Learn more about how to buy your first rental property.

How to calculate a cap rate?

You can use this formula to calculate a cap rate:

Cap rate = Net Operating Income (NOI) ÷ Property value

Your Net Operating Income is what's left from a year's rental income once you've paid the running costs of the property, like maintenance, insurance, and taxes. It doesn't include your mortgage payments.

Here's an example.

Say you buy a commercial building for 1,000,000 USD. It brings in 120,000 USD a year in rent, and your operating expenses come to 30,000 USD. That leaves you with a Net Operating Income of 90,000 USD.

Divide 90,000 by 1,000,000, and you get a cap rate of 9%.

What is a good cap rate for a commercial property?

There's no fixed answer to this question because it depends on many different factors, such as the property type and the wider market.

For most multifamily properties, a good cap rate sits somewhere around 8% to 10%.¹

A cap rate below that range usually points to a lower-risk property with steadier income, but a smaller return. A cap rate above it can mean a bigger return, but often with more risk attached.

To give you a sense of current benchmarks, here are the average national cap rates by property type:

Keep in mind that these figures are for the US.

Cap rates can vary widely from one country to the next, so if you're buying property abroad, you'll want to do more research to get a more accurate picture.

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Key factors that determine a “good” cap rate for a commercial property

A cap rate doesn't exist in a vacuum. The same number can look great for one property and risky for another, depending on the context behind it.

Here are the main factors that can tell you whether a cap rate is good:

• Location plays a major role, since properties in strong, in-demand markets tend to carry lower cap rates because they're seen as safer
• The property type is important—industrial, office, retail, and multifamily buildings each come with their own typical ranges
• The quality and length of your tenant leases affect risk, with long-term tenants on stable leases lowering it
• The condition and age of the building influence future costs and returns
• Broader market conditions, such as interest rates and local supply and demand, push cap rates up or down over time

Because these factors interact, a "good" cap rate for you depends on your own risk tolerance and what you want out of the investment.

If you're a cautious buyer, for example, a number that's perfect for you might fall short for someone who wants higher returns and has a higher risk tolerance.

Ultimately, it comes down to your investment strategy and goals.

Limitations of using the cap rate alone

The cap rate is a useful starting point, but it's not the only factor you should consider when making commercial real estate investments.

It gives you a snapshot of income against price at a single moment, but leaves out a lot of important details, such as:

• Financing: Cap rate assumes you're buying in cash and won't reflect your mortgage costs or how a loan changes your return
• Future growth: A property in an up-and-coming area might have a low cap rate today, but strong potential to rise in value
• Income accuracy: Understated expenses or overstated rent will make the cap rate look better than the property deserves
• Capital cost: The cap rate doesn't account for big one-off expenses like a new roof or major repairs down the line

For these reasons, treat the cap rate as just one tool among many different ones. Pair it with a closer look at cash flow, financing, growth potential, and the condition of the property before you commit to anything.

In other words, a cap rate of 10% or even 15% doesn't immediately mean that you should invest in the property. There's a lot more to consider.

Are you thinking of buying a commercial property overseas? Then you'll likely need to move money across borders, whether that's for the purchase, ongoing expenses, or collecting rent.

When you send money abroad through a bank, you'll often have to cover transfer fees and currency exchange rate markups if you're converting from one currency to another, such as from USD to EUR.

A currency exchange rate markup can be as high as 3% or even 5%.

Over time, these charges can add up to hundreds or even thousands of USD, especially if you're sending large or regular transfers.

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Sources

1. EquityMultiple - What Is a Good Cap Rate?
2. JP Morgan - The role of cap rates in real estate

Sources checked 06/17/2026