Cap rate by asset class

Generally, a high capitalization rate will indicate a higher level of risk, while a lower capitalization rate indicates lower returns but lower risk. That said, many analysts consider a "good" cap rate to be around 5% to 10%, while a 4% cap rate indicates lower risk but a longer timeline to recoup an investment.

You also want to make sure your cap rate isn't too low though, as it is less likely to generate a good return on investment. Remember cap rate accounts for both risk factors and potential profitability on a property. So, you should always aim to invest in rental properties with cap rates of 8%-12% for the best outcome.

Cap rates are seen as a measure of risk and return, a low cap rate of 3-5% would mean the asset is lower risk and higher value; a higher cap rate of 8-10% reflects a lower price, higher risk and higher return.⁶