Multifamily Cap Rates: Trends, Current Rates, & Calculator

 

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When evaluating multifamily properties, the capitalization rate, or cap rate, is one of the most important metrics for real estate investing. It serves as a measure of a property’s profitability for investors. Whether you’re new to real estate investing or a seasoned pro, understanding multifamily cap rates helps you make informed decisions.

So, this post dives into everything you need to know about multifamily cap rates, including how they vary by market, how to calculate them, historical trends, and practical tips to maximize your returns. We’ve also included a free cap rate calculator to help you assess potential investments.

This post covers:

• What are cap rates?
• What is a good cap rate for multifamily properties?
• Historical multifamily cap rates
• Current multifamily cap rates
• How to increase cap rates?
• Trends for multifamily cap rates
• Multifamily cap rate FAQs

 

 

What are cap rates?

Capitalization rates (also referred to as cap rates) are used in commercial real estate to evaluate a property’s expected Return On Investment (ROI).

Investors measure the relationship between a property’s Net Operating Income (NOI) and its market value or purchase price expressed as a percentage.

Cap rates help you compare properties across markets and asset classes by showing their income potential.

 

How to calculate cap rates

The multifamily cap rate formula is as follows:

Cap Rate = Net Operating Income (NOI) / Property Value or Purchase Price x 100

For example, imagine you’re considering purchasing a multifamily property valued at $2 million with an annual NOI of $120,000. You would calculate the cap rate as follows:

Cap Rate = 120,000 / 2,000,000 x 100

Calculating this would give us a 6% cap rate, giving us an idea of the property’s return relative to its cost.

 

Multifamily cap rate calculator

Enter your property’s value, income, and operating expenses to get an estimated cap rate from our calculator.

 

What is a good cap rate for multifamily properties?

Generally, a “good” multifamily cap rate falls between 5% and 10%. Cap rates below 5% are considered lower risk, but recouping the costs takes longer. Meanwhile, rates over 10% are considerably higher risk but offer a greater ROI.

However, several factors will influence what an ideal cap rate is, such as:

• Location
• Property type
• Local market
• Future trends
• Capital invested

For instance, primary multifamily markets like New York City or San Francisco usually have cap rates of around 5%. Higher property values and greater demand make primary market investments safer than those in secondary or tertiary markets. In those cases, secondary markets, such as Austin or Denver, may have cap rates between 5% and 7%. These markets balance risk and reward, attracting investors who seek both stability and higher cash flow.

Tertiary markets, like Sacramento or Memphis, typically have multifamily cap rates exceeding 7%. While these properties may provide greater returns, they come with added risk due to factors like economic volatility, less demand, or higher vacancy rates. Investors in tertiary markets often pursue value-add opportunities, where improvements or renovations can increase the property’s NOI and justify the higher risk.

Ultimately, what defines a “good” cap rate will depend on your investment strategy and the specific markets you’re evaluating. It’s important to remember that cap rates are just one piece of the puzzle. For a well-rounded analysis, consider other key metrics, such as cash-on-cash return, internal rate of return (IRR), and occupancy rates. Combining these insights will help you make more informed and strategic investment decisions.

 

Historical multifamily cap rates

From broader trends and market fluctuations, multifamily cap rates have undergone significant changes over the past decade.

Here’s a historical breakdown of the most notable developments through the decade:

• Early 2010s. Cap rates were relatively high following the Global Financial Crisis as markets recovered. Investor confidence was cautious, and lending conditions were stricter.
• Mid-to-late 2010s. A long-term downward trend emerged, driven by low interest rates, strong investor demand, and favorable market fundamentals. Cap rates steadily declined across primary and secondary markets.
• Historic lows in 2020-2022. Cap rates hit historic lows, averaging around 4.5%, thanks to continued low interest rates and record-high investor interest in multifamily properties. So, aggressive acquisitions were driven by easy access to affordable financing.
• Regional variations in 2022-2023. The Northeast experienced the largest cap rate increases, rising by 112 basis points. Meanwhile, the midwest saw moderate increases, with cap rates rising by 85 basis points during the same period.
• Rising cap rates in 2022-2024. Cap rates rose by approximately 125 basis points, reaching an average of 5.75% — the highest level since 2014. This sharp increase was primarily due to rising interest rates, tighter lending conditions, and economic uncertainty.

 

Current multifamily cap rates

According to CBRE multifamily cap rates, 2024 multifamily cap rates are approximately 5.3%. These rates are closely tethered to economic conditions, especially interest rates. With that said, the Federal Reserve’s recent interest rate cuts are expected to lower the multifamily cap rates gradually going into 2025.

Important note: Given the current economic conditions and dynamics, investors should closely monitor local markets for the most accurate and up-to-date cap rate information.

 

How to increase cap rates?

A blend of macroeconomic factors and individual property performance influences cap rates. So, it’s important you understand both to obtain the best returns possible.

Here are the economic factors that influence cap rates:

• Interest rates. One of the most significant factors influencing cap rates is the cost of borrowing. When interest rates rise, financing becomes more expensive, which can put downward pressure on property values and, in turn, lead to higher cap rates. Conversely, lower interest rates make borrowing cheaper, increasing property demand and lowering cap rates.
• Gross Domestic Product (GDP). A strong economy creates jobs and wage growth, driving up the demand for housing, especially multifamily. With an increase in demand comes lower cap rates, particularly in high-growth markets.
• Unemployment. Low unemployment supports a stable tenant base, so multifamily properties are less risky. On the other hand, stable employment in a region can keep cap rates low, as investors are willing to pay a premium for reduced vacancy risks.
• Location. Economic shifts influence the desirability of certain real estate asset classes. For instance, poor economic growth could create situations in which renters move from a Class A asset to Class B, meaning demand for affordable housing increases and cap rates within categories fluctuate.
• Asset class. Regions experiencing population growth see increased jobs and investments in infrastructure and affordability. So, as housing demands outpace supply, cap rates will likely fall.

 

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Strategies to increase cap rates

In addition to the economic factors, there are actionable steps investors can take to impact cap rates directly.

Those strategies are:

• Increasing rental income
• Lowering operating expenses

 

Increasing rental income

One of the most effective ways to improve NOI is to boost rental revenue. Enhancing the value of your property can help you charge higher rents while attracting tenants willing to pay a premium for quality and convenience.

You can increase rent at your multifamily asset by:

• Renovating units. Modernizing interiors with updated kitchens, bathrooms, or appliances can help boost rental rates.
• Adding amenities. Features like fitness centers, coworking spaces, rooftop lounges, or pet-friendly accommodations are desirable amongst renters and justify higher rents.
• Install smart technology. Cloud-based access control systems that enable residents to use their mobile phones as credentials throughout the entire property offer an elevated level of security and convenience that they’re willing to pay more for.
• Monetizing services. Consider other revenue streams by implementing parking fees, storage rentals, concierge services, or amenity reservations.
• Improved marketing. Implement high-quality photos, virtual tours, self-guided touring, and targeted digital advertising to attract high-value tenants.

 

Lowering operating expenses

Reducing costs without compromising resident satisfaction is another way to improve NOI, which can be achieved by:

• Focusing on energy efficiency. Install LED lighting, smart thermostats, and renewable energy sources to lower the cost of utilities.
• Automating redundant duties. Automate redundant administration tasks by centralizing or using technology such as AI or a property management system (PMS).
• Negotiating contracts. Review and negotiate service contracts with vendors to get the best value without sacrificing quality.
• Implementing preventive maintenance. Install the necessary IoT devices to implement preventative maintenance procedures, reducing the chance of serious repairs and lowering costs.

 

Trends for multifamily cap rates

Multifamily cap rates are slowly increasing, driven by rising interest rates and changing lending conditions. After years of record-low cap rates, the market is becoming more balanced, offering new opportunities for adaptable investors.

Factors like construction costs, rental trends, and regional economies can impact cap rates. Urban markets appear to remain steady, while suburban areas may show strong potential for growth.

Multifamily properties continue to be a potentially solid investment, and staying informed about economic trends can help you make the most of these evolving conditions.

 

Multifamily cap rate FAQs

• Is a higher cap rate better?
• What is the difference between multifamily cap rates vs. interest rates?
• Are multifamily cap rates rising?

 

Is a higher cap rate better?

A higher cap rate is not necessarily better. Simply, a higher cap rate means a property offers greater potential returns relative to its price, but it also typically signals higher risk, such as being in a less desirable location or requiring more management.

Lower cap rates, often found in prime markets, indicate stability and lower risk but with smaller returns. Whether a higher or lower cap rate is better depends on your goals. Higher cap rates suit growth-focused strategies, while lower cap rates align with stability and long-term appreciation.

 

What is the difference between multifamily cap rates vs. interest rates?

Cap rates measure a property’s income relative to its value, helping investors compare opportunities.

Interest rates are the cost of borrowing money to finance a property.

While cap rates evaluate property performance, interest rates affect affordability. When interest rates rise, cap rates will increase too. Higher borrowing costs lower property values, whereas falling interest rates drive competition and push cap rates lower.

 

Are multifamily cap rates rising?

Yes, cap rates have risen recently. The rise is driven by higher interest rates. This marks a shift from the historically low cap rates seen in the last few years, but rising cap rates may signal both increased risk and opportunities to acquire properties at better prices.