1. Cap rates are a key metric for determining multifamily property values
  2. Understanding a property’s NOI and market value can help buyers gauge returns
  3. Cap rates can also be used to assess the risks of an investment opportunity

Cap rates can help multifamily buyers and their financial partners evaluate a property’s performance and potential growth while flagging any investment risks. Calculated as a percentage, they can show if a rentable property will generate enough income after accounting for all expenses.

What is a Cap Rate for Multifamily?

Capitalization rates, more often known as cap rates, are one of the most essential metrics for multifamily sponsors looking to estimate rates of return on investment properties.

When used correctly they represent the yield an owner can expect by taking a rental property’s net operating income (NOI) and dividing it by the asset’s current market value to get a comparative measure. NOI includes all of the revenue a property earns minus operating expenses, vacancies, and uncollectible receivables.

Knowing these figures precisely is vital to covering a buyer’s cost basis in the short term and providing liquid profits in the long term. Of course, cap rates can vary widely across the U.S. commercial real estate sector.

While cap rates are never fixed and will always fluctuate depending on the asset class, geographic market, and macroeconomic factors like supply and demand, there are some general formulas that borrowers can use to maximize their proceeds.

What Influences a Cap Rate in Multifamily?

Multifamily cap rates can vary widely by city and by market across the U.S.

In real estate—a potentially profitable, but physically anchored business—location is still everything. Some cities, for example, have higher property taxes, operating costs, vacancy rates, and investor demand, which can all influence local cap rates.

In dense and highly competitive markets, like New York and Miami, cap rates tend to be lower, due to overall pricing levels, and will often hover below 5%. In markets where asset values are still rising, cap rates can surpass 8%.

Some of the other main factors that can influence cap rates today are asset quality and age, neighborhood, management style, and tenant base. Local employment and average income also play a major role in determining cap rates. Multifamily markets with lower employment and income rates can lead to lower rents and higher tenant turnover, especially during economic downturns.

It is also important to note that some factors can make a low cap rate appear better than it is, or a high cap rate appear worse than it is. In most cases, this occurs when internal or external conditions alter calculations or when cap rate and NOI numbers are misinterpreted.

If a property increases in value while maintaining consistent NOI, for example, its cap rate will fall—a process known as cap rate compression. If the NOI increases while the property maintains or loses its current value, the cap rate will rise.

Rising interest rates are also a key consideration as they start to push down property values. This can lead to higher cap rates in some prime markets and pave the way for cap rate compression, which typically indicates a market recovery.

Cap rate compression can create new opportunities for multifamily buyers as well as property owners looking to sell or refinance.

Good Cap Rates for Multifamily

What is a good cap rate for multifamily investors in today’s market?

It can be helpful to start with the national cap rate average of about 4.7, a figure for prime multifamily assets from the first quarter of 2023.

An important factor for many property owners and buyers is asset vintage. Industry experts categorize multifamily properties into three main tiers based on their age, location, overall quality, and average tenant incomes. Class A assets are top-tier properties that were built in some of the most desirable neighborhoods within the last 10 years. Class B assets fall within the 20-year range and are typically designed with fewer high-end touches for a less wealthy tenant base. Class C assets are more than 30 years old with even fewer bells and whistles and are often located in lower-income neighborhoods.

With Class A multifamily properties in many cases, cap rates can often be lower than with Class B and Class C assets, due to the fact that higher-end properties require greater capital investments (despite their usually higher rents). At the same time, many older properties have higher costs, including maintenance, which can lower their cap rates in some cases.

This doesn’t mean a higher cap rate is always better. Higher cap rates tend to carry more price volatility, as CRE investors and lenders saw with the many challenges and adjustments brought on by the pandemic.

In any market environment, cap rates allow sponsors and their financial partners to gauge the potential downsides of a multifamily investment property.

A lower cap rate—relative to similar properties—is typically associated with a less risky investment, while a higher cap rate in the same context may imply a higher-stakes purchase. 

Current Cap Rate in Multifamily

Looking at the big picture, the country’s average multifamily cap rate is expected to increase slightly from its current 4.7%, according to Fannie Mae, but not above the 5% threshold.

Multifamily cap rates nationwide are down from a 2015 level of about 6%. That means asset prices have been gradually cooling off, which can offer upside potential for new and seasoned multifamily investors across various markets.

Historically, cap rates for multifamily properties have hovered between 4% and 8%, below other commercial assets like office, hotel, and retail where cap rates have exceeded 10% in recent years.


In any market environment, cap rates allow sponsors and their financial partners to gauge the potential downsides of an investment property. A lower cap rate—relative to similar properties—is typically associated with a less risky investment, while a higher cap rate in the same context may imply a higher-stakes purchase. 

  • Cap rates allow multifamily sponsors to size up comparable deals in different markets using the same underlying metrics for consistency.
  • Knowing a property’s cap rate can help buyers and their lenders assess potential risks and returns and see if property management is a concern.
  • Sponsors can leverage this information to identify good investment opportunities and gauge how effective property management is with an existing portfolio.

Here is one example of how a buyer can apply the cap rate formula:

If the sponsor acquires a multifamily portfolio at a market value of $10 million and expects to see gross rental income of $8 million and operating expenses of $1.5 million, the cap rate would amount to 6.5%.

Breaking down the numbers:

  • $8 million minus $1.5 million equals $6.5 million
  • $6.5 million divided by $10 million equals 6.5%

If the sponsor unexpectedly loses tenants and the gross rental income declines to $7 million, the property’s cap rate would then fall to 5.5%.

When considering a multifamily property investment, sponsors need to understand everything that goes into NOI and cap rates.

Without a clear sense of net operating income, it’s impossible to get a clear sense of a property’s cap rate. NOI allows lenders and appraisers to assess how much net income a property earns.

NOI is hard to manipulate and frequently used to assess the relative financial strength of a property. NOI is also used to calculate other measures like debt service coverage ratio (DSCR), a tool for underwriters evaluating multifamily loans secured by income-producing properties.

Leap to Loans

For multifamily investors looking to leverage the latest market intel, Lument’s Leap to Loans portal offers market intel and timely information to help determine the right cap rates and other key metrics.

Multifamily buyers and owners looking for small balance loans (SBL) can use the Leap to Loans platform to navigate many circumstances that involve precise cap rate calculations. Lument’s originators discuss cap rates and even finer details with the company’s many clients around the country on a regular basis. These discussions lead to more vibrant multifamily markets, stronger lender relationships, and better due diligence.

For more information, please contact Lument’s Leap to Loans team today.


How are multifamily cap rates calculated?

The cap rate represents the yield an owner can expect on an investment property and is calculated with the formula: Cap rate equals net operating income (NOI) divided by an asset’s current market value.

Is a higher cap rate better?

In many cases, no. But there are a few caveats with high and low cap rates. A low cap rate is typically associated with less risky investments while a higher cap rate in the same context may imply a riskier purchase. Certain factors can make a low cap rate appear better than it is, or a high cap rate appear worse than it is.

Are interest rates essential when calculating cap rates?

Multifamily investors who want to take advantage of all market and economic factors should weigh the cost interest with every property and related loan. Interest rates are a key determining factor in all deals that involve debt financing.

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