What commonly represents a good capitalization rate?

A capitalization rate, or cap rate, is a key metric used in real estate to assess the potential return on an investment property. A good cap rate typically indicates a balance between risk and return, helping investors evaluate how well a property is likely to perform financially.

The range of 5% to 10% is generally considered a standard benchmark for a good capitalization rate in most real estate markets. This range reflects a reasonable return that aligns with typical investment expectations while accounting for the inherent risks in property ownership.

A cap rate lower than 3% may indicate a property with very low returns, possibly suggesting a premium price or higher levels of risk relative to income, which might not be attractive for most investors. Conversely, cap rates over 15% often suggest higher risk investments or properties in less desirable locations, which may not appeal to conservative investors. The 10% to 15% range is also seen as favorable but slightly riskier than the 5% to 10% range; this is why the 5% to 10% range is regarded as the sweet spot for a good cap rate, providing a strong return while minimizing risk.