What Is a Good Cap Rate for a Rental at 7%+ Mortgage Rates?

A rental listing says "6% cap rate" as if that settles it. This week it settles very little. Freddie Mac's weekly survey put the average 30-year mortgage at 7.28% on October 1, daily lender quotes were near 7.5% on October 8, and the 10-year Treasury closed at 5.28% on October 7 — its highest level in more than two decades. When borrowing costs more than the property earns, a cap rate that looked fine two years ago now loses money every month.

This guide works through one property — the same $350,000 house we used in our rental property depreciation guide — to show what cap rate measures, what it leaves out, and how to tell whether a given cap rate works at today's rates.

It is written for individual U.S. landlords buying one to four units with a conventional mortgage. It does not cover commercial or syndicated deals, where cap rates are priced off broker surveys and lender spreads, or short-term rentals, whose income swings too much for a single-year snapshot. Nothing here is investment advice; the point is to make the arithmetic visible.

The formulaWhat cap rate is, and what goes into it

Cap rate (capitalization rate) is a property's net operating income divided by its price. It is the return the building would pay you in a year if you bought it with cash.

What makes two cap rates comparable is what goes into NOI. Three items are often left out of a listing's number:

• Vacancy. NOI uses the rent you collect, not the rent on the lease. Even a well-run house sits empty between tenants.
• Management. If you manage it yourself, your time still has a price — and a buyer of the property would pay a manager.
• A capital reserve. Roofs, furnaces and appliances wear out. They are not operating expenses on the tax return (see rental repairs vs. improvements), but a cap rate that ignores them overstates what the house earns.

And one item never goes in: the mortgage. Cap rate describes the property, not how you financed it. Financing is the next step.

The houseOne rental, two cap rates

The house rents for $2,500 a month. Here is the same year counted two ways — the way a quick listing calculation does, and with management and a reserve included:

The difference is more than a percentage point. Neither number is wrong; they answer different questions. The listing-style figure is roughly what a self-managing owner pockets before the roof needs replacing. The full figure is what the house earns as a business — and it is the one to compare against the cost of money.

The testNegative leverage: when the loan costs more than the house earns

Financing helps you only when the property earns more on each dollar than the loan costs on each dollar. The loan's cost here is not the interest rate but the mortgage constant: a year of payments, principal included, divided by the loan. At 7.5% on a 30-year loan the constant is 8.39%. Our house earns 4.35%.

When the cap rate is below the constant, every borrowed dollar loses money. That is negative leverage, and it shows up straight in cash flow:

At 7.5% the owner puts in $87,500 and gets back −$6,805 a year: a cash-on-cash return of −7.8%. Bought with cash, the same house would return +4.35%. The mortgage turned a modest positive return into a loss.

The benchmarkCompare the cap rate with the 10-year Treasury

The second test is about risk rather than cash. A 10-year Treasury pays 5.28% with no tenants, no roof and no vacancy. A rental should pay more than that for the work and the risk. Investors talk about this gap as the cap rate spread.

Our house is on the wrong side of it: 4.35% full NOI is 0.93 points below the Treasury, and even the generous 5.51% is only 0.23 points above it. In other words, at today's price this house pays less than a government bond. That is the clearest sign that the price — not the landlord's spreadsheet — is what has to move.

The answerSo what is a good cap rate right now?

There is no single national "good" number, and you should be wary of anyone who quotes one: cap rates differ by city, neighborhood, building age and how NOI was counted. CBRE's own first-half 2026 survey reports mostly expectations — about 60% of respondents expected no change over the next six months — rather than a figure a small landlord could price against.

What you can do is work out the cap rate that your financing needs. With the same rent and expenses, here is what each target cap rate would require:

A practical rule for one-to-four-unit buyers at today's rates:

• Cap rate above the mortgage constant (roughly 8.2–8.4% at 7.3–7.5%) — positive leverage; the loan adds to your return.
• Cap rate above the 10-year Treasury but below the constant — the property is sound, but you will be feeding it monthly unless you put more down.
• Cap rate below the 10-year Treasury — at this price, you are paid less than a bond for running a business. Negotiate or walk away.

Count NOI the full way before applying the rule. A listing-style cap rate makes every deal look a point better than it is.

The trackerHow the Rental Income Tracker shows these numbers

The Rental Income Tracker shows a cap rate, a cash-on-cash return and a monthly cash flow for each property, and a cap rate for the whole portfolio. How it gets them, so you know what you are reading:

• NOI is the last 12 months of income you logged, minus every expense except the mortgage. Until you have logged any income, it uses the rent on the lease.
• Cap rate divides that NOI by the property's current value if you entered one, otherwise by the purchase price. Entering today's value turns it into the return on what the house is worth now, which is the right figure when deciding whether to keep it.
• Cash-on-cash divides a year of cash flow by your down payment (purchase price minus loan). It does not add closing costs; including roughly 3% of the price would move our example from −7.8% to −6.9%.

The tracker does not add management or a capital reserve unless you log them. If you manage the property yourself, the tracker's cap rate is the listing-style number. Log a monthly reserve as an expense if you want it to show the full one. For how to record expenses so these figures are right, see how to track rental income and expenses.

The ratesWhy this is a 2026 problem

Most small-landlord math of the last decade was done with mortgages near 3–4%, when a 5% cap rate already beat the loan. Rates have climbed since — our look at the October mortgage jump shows what the spike costs a buyer, and our 10-year Treasury explainer shows why long rates are where they are. Prices in many markets have not fallen to match, which is why so many listings now show cap rates below what it costs to finance them.

Two things to keep in mind before reacting:

• Investment-property loans are usually priced above the survey averages quoted for homeowners. Freddie Mac's survey covers loans for people buying a home to live in; ask lenders for a quote on an investment property before you run the numbers.
• A rate quote is not a rate lock. Rerun the numbers on the day you lock.

Where these numbers come from

• Rates: Freddie Mac Primary Mortgage Market Survey, 30-year fixed, week of October 1, 2026 (7.28%, via FRED series MORTGAGE30US); daily lender average of 7.52% for October 8, 2026 (Yahoo Finance mortgage rate report); 10-year Treasury par yield of 5.28% at the October 7, 2026 close (U.S. Treasury daily par yield curve).
• The property: $350,000 price, $2,500 monthly rent, 5% vacancy, property tax $4,200, insurance $1,900, repairs $2,200, other $900 — the same figures as our depreciation guide. Added for the full NOI: management at 8% of rent collected and an $1,800 annual capital reserve; both are assumptions, and your own management fee and reserve can differ.
• Financing: 25% down ($87,500), $262,500 loan, 30-year fixed, payments from the standard amortization formula. Closing costs are excluded unless stated (3% of the price where shown).
• What the model leaves out: appreciation, principal paydown, tax effects (depreciation usually makes a rental's taxable result lower than its cash result), rent growth and expense inflation. Leaving out principal and appreciation makes the cash-on-cash figures look worse than the total return; leaving out rising expenses and periods of vacancy longer than 5% makes them look better.
• Market cap rates: we did not publish national ranges because the latest CBRE survey page available to us (H1 2026, published August 26, 2026) reports expectations rather than averages, and secondary summaries did not match each other.

FAQFrequently asked questions

What is a good cap rate for a rental property in 2026?
One that covers your cost of money. With 30-year rates around 7.3–7.5%, a cap rate above roughly 8.2–8.4% gives positive leverage; between the 10-year Treasury (about 5.3%) and that level, the property needs a larger down payment to break even; below the Treasury yield, you are earning less than a bond.

Does cap rate include the mortgage?
No. Cap rate is net operating income divided by price and describes the property as if bought with cash. The mortgage is accounted for in cash flow and cash-on-cash return.

What is the difference between cap rate and cash-on-cash return?
Cap rate measures the property's earnings against its price. Cash-on-cash measures your cash flow after mortgage payments against the cash you put in. Leverage makes cash-on-cash higher than the cap rate when the loan is cheap and lower when it is expensive.

What is negative leverage in real estate?
It is when the mortgage costs more per dollar borrowed — measured by the mortgage constant — than the property earns per dollar of price. Each borrowed dollar then lowers your return, and cash flow is usually negative.

Should vacancy, management and repairs be in NOI?
Yes. NOI should use rent actually collected and include management, routine repairs and a reserve for big replacements. Leaving them out makes a cap rate look about a point better than the property really earns.

Why compare a cap rate with the 10-year Treasury?
Because a Treasury pays its yield with no tenants or maintenance. A rental should pay a premium over it for the risk and the work. When the cap rate is below the Treasury yield, the price is high relative to the income.

Before you make an offer