What Cap Rates Are You Targeting Right Now? 7%+ Still Realistic?

Question

Lately I’m seeing a lot of mixed opinions on target cap rates. Some investors say they're holding out for 7–8%+ deals, while others say those just don’t exist in solid markets anymore without serious hair on them.

Curious what others here are actually underwriting to in 2025:

What cap rates are you realistically seeing/offering/closing on?
Are you prioritizing higher cap rates in smaller markets, or accepting lower rates in strong MSAs?
How are lenders viewing these deals with current rates?

Trying to get a clear picture of expectations vs. reality. Appreciate any perspectives or recent experiences you’re willing to share!

Thanks in advance for the insights. Always looking to connect with people serious about multifamily investing.

Brian Burke · Answer

@Daniel Sehy targeting a cap rate is a fool's errand, most commonly practiced by the same folks that complain that they can't find any good deals.

Most important is to realize what cap rate really is--it's a thermometer for investor sentiment.  When people are bullish on a certain type of property in a certain area, they are likely to pay more for an income stream (meaning a lower cap rate) than they are if they were bearish.  Market cap rates vary between property types, classes, and locations. It's not important that you buy at any specific cap rate, what's important is how your entry cap rate compares to other similarly-situated like-kind assets in the same area.

A better way to analyze income property is by backing into a return, such as an IRR and/or Cash-on-Cash return using historical financials, comparable property's rents, realistic expense assumptions, and using an EXIT cap rate that is realistic for the property type in that area for the purpose of estimating the future resale value.

Another way to say this is, the first thing you want to know when buying any property is what you can sell it for.  Cap rates are useful for that, but not much else.

Here are links to a couple of articles that I wrote for the BP blog a few years ago.  They are just as applicable today, and may be helpful in shaping how you approach the cap rate dilemma:

https://www.biggerpockets.com/blog/capitalization-rate-definition-myths-debunked

https://www.biggerpockets.com/blog/real-estate-cap-rate-proper-use

And I wrote a whole subchapter on cap rate in The Hands-Off Investor:   https://www.biggerpockets.com/syndicationbook

Daniel Sehy · Answer

@Brian Burke, Really appreciate you taking the time to break that down—and for the links, too. I just read your comment a couple of times and it's already helping me think differently about how I'm approaching underwriting.

I'm definitely early in this journey (still working to get that first deal lined up), so I want to avoid falling into the trap of chasing a “magic number” without understanding what drives it. Your point about cap rate being more of a market sentiment indicator than an absolute rule makes a lot of sense.

I’m going to dive into those articles you shared, but one thing I’m trying to wrap my head around is how you practically compare “like-kind” assets when you’re evaluating an area you don’t know well yet. Do you typically rely on broker BOVs, sales comps, CoStar-type data, or just getting out there and touring everything you can?

Thanks again for the thoughtful reply. Exactly why I joined BP in the first place.

Arn Cenedella · Answer

@Daniel Sehy

To add to @Brian Burke comments:

One could also ask WHAT cap rate?

Cap rate based on actuals?

Cap rate based on proforma?

Some folks like “yield on cost” in value add deals.

Yield on cost would be Stabilized NOI/(purchase price plus cap ex).

This would tell you what the yield aka cap rate is on a value add deal after biz plan is executed and stabilization is achieved.

I like the yield on cost approach.

Another way to say this:

I am willing to put 12 to 18 months of effort in to get a property performing in a top notch manner - this could be physical cap ex improvements or it could be operational improvements or both.

What will that property produce in a year or two?

That’s what I aim for.

We acquired an asset at a going in cap rate of 5% back in May 2021. We projected year one cash flow at 6% - nothing to get too excited about. Now at the start of year 5, our cash on cash return is 16%. Even at a 6% we have almost doubled that value of the property.

So when thinking about cap rates, what the cap rate is NOW is important perhaps what is even more inportant is where an investor can bring that property in 2 or 3 years.

The finish line is NOT year 2. The finish line is year 5 or 7 in my mind.

Hope this helps.

Arn

Brian Burke · Answer

Yes, all of the above that you mentioned plus one more (my favorite): underwrite everything.  Don’t buy any of it, but follow the result and note the sale prices and compute the going-in cap rate based on your underwriting.  Next is the tricky part: forecasting how today’s cap rate from these trades will move by the time you expect to sell, so you can estimate the exit cap rate. Some argue to just decompress today’s cap rate by some standard figure, such as 10bps/year, but that strategy lacks context.  It’s really part art, part science, unfortunately.

Syed Ahmed · Answer

Great question, definitely a moving target in this market. I’ve seen most 2025 deals in strong MSAs falling in the 5–6% range, with anything pushing 7%+ usually needing some serious repositioning or coming from smaller tertiary markets.

Cap rate expectations have shifted fast, especially with lending rates where they are. Underwriting feels tighter, and lenders are definitely stress-testing more aggressively now.

Appreciate you starting the convo, always helpful to hear what others are seeing across different regions and deal sizes.

Arn Cenedella · Answer

@Daniel Sehy

market knowledge is the key to not getting “overly optimistic”.

An investor needs to know their market or anything that goes into the excel document is nonsense.

My market is Greenville SC. It’s our only market. We own say 500 units in this market. We KNOW what units will rent for when we see them. Our first hand experience guides our projections.

What can we rent this unit for?

What will it cost to renovate this unit?

How “upscale” should we renovate?

The answers to these questions and more are ALL based on market knowledge.

If you are a first time investor you need to out the leg work in to learn your market. Act like like a potential tenant and go see every similar building in your market. That’s how you learn the market. That’s how you Future rents.

Be a detective and investigate.

Then make a bet invest your capital and go for it.

Brian Burke · Answer

I focus on sentiment.  If the market is in the dumps and no one is buying, I assume that the market will be better in the future and my exit cap can compress from current rates, assuming there aren’t other macro or micro factors at play. Conversely, if the market is absolutely on fire and everyone is throwing money around like there’s no tomorrow, I assume it will be worse when it’s time st sell, so I decompress the exit cap (notwithstanding modifications due to macro/micro).

This approach fits the thesis that cap rate is simply a measure of market sentiment. Thus the mission, should you choose to accept it, is to attempt to forecast future sentiment and translate that into a number. That’s the “part art, part science” aspect.

Daniel Sehy · Answer

@Arn Cenedella Really appreciate you breaking this down. Honestly, this is the kind of perspective I’m hoping to pick up here.

Your point about what cap rate you're talking about—actuals vs. pro forma vs. yield on cost—makes a ton of sense. I hadn't really thought about how different those numbers can be or how easy it is to get tunnel vision on just “the cap rate.”

Your example from 2021 is super helpful too. It really puts into perspective that the goal isn’t just buying at a certain cap rate, but what you can turn it into over time.

Still working on getting my first deal, so I’m trying to wrap my head around this whole yield-on-cost approach. When you’re looking at a deal, how do you usually sanity-check your stabilized projections so you don’t get too optimistic?

Thanks again for taking the time to share all this—it’s exactly what I was hoping to learn here.

James McGovern · Answer

Do we dare ask the value of understanding cap rates and whether there are better measures to use?

Daniel Sehy · Answer

@Brian Burke That’s a really solid approach. Tracking your own underwriting vs. actual sales feels like a great way to stay honest about assumptions.

Exit cap rate forecasting seems like one of those things where experience really matters. Curious—when you’re stress-testing exit assumptions, do you focus more on macro trends (like interest rates, supply pipelines) or do you rely more on hyper-local comps and market cycles?

Appreciate you sharing your process—it’s super valuable.

What Cap Rates Are You Targeting Right Now? 7%+ Still Realistic?

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