Open any "what is cap rate" article and you will read some version of: "the cap rate is a measure of risk". This is misleading. The cap rate is a price.
It is the yield the market is currently willing to accept for stabilized income from this asset class, in this market, today. It moves with interest rates, capital flows, and sentiment, not with the inherent riskiness of the underlying real estate.
A multifamily building isn't riskier in 2024 than it was in 2022
In 2022, mid-market multifamily traded at 4.25–5.25% cap rates. In 2024, the same mid-market multifamily traded at 5.75–6.75%. The buildings did not become 1.5x riskier. The Fed funds rate moved from 0% to 5%+, the 10-year Treasury repriced, and the bid-side adjusted.
If you read cap rate as risk, this looks confusing. If you read cap rate as price, it is obvious. The market re-priced the asset class because the cost of debt and the alternative yield (Treasuries) both moved.
What "above market" cap rates actually mean
A property listed at 200 bps above the segment median cap rate is rarely a steal. The three real explanations, in order of frequency:
- The pro forma is fiction. NOI is calculated assuming rents you haven't proven and expenses that omit replacement reserves, current insurance, or post-sale property tax reset.
- There's a real problem. Major capex coming, a key tenant rolling, deferred maintenance, an expiring tax abatement, or a market the seller is exiting for non-obvious reasons.
- Genuine mispricing. Real but rare. The seller wants out fast or doesn't know the market.
A wide cap rate always has a reason. The first 200 bps of premium usually maps cleanly to a real risk factor. The third 200 bps is where you find genuine deals — or genuine traps.
How to actually read a deal
Three sanity checks before you trust a quoted cap rate:
- Verify NOI. Trailing 12-month actuals only — not pro forma, not "stabilized", not "as if". Pull the rent roll and the expense detail.
- Re-underwrite expenses at full market. If the seller's management fee is 2%, restate at 4%. If they're self-insured, add a real insurance line. If property tax hasn't been reset, calculate post-sale.
- Compare to current closed comps in the same market and asset class — not 18-month-old comps from before the rate cycle moved.
The exit cap is what kills returns
Most beginner CRE underwriting assumes you exit at the same cap rate you entered. This is the biggest source of overstated IRRs.
A 5.5% entry cap with a 5.5% exit cap and 3% rent growth produces a deceptively attractive return. The same deal modeled with a 6.0% exit cap (50 bps of cap rate widening over 5 years) often turns negative on returns. Always model exit cap 50–100 bps wider than entry — anything less is assuming the rate environment doesn't move.
Our cap rate sanity check tool compares your number against current market ranges by asset class, market tier, and property class — drawn from CBRE, JLL, RCA, and Marcus & Millichap survey data through Q4 2024. It also surfaces a 5-year history of where the segment has been across the rate cycle, so you can see whether today's range is tight, wide, or in line.