The Capitalization Rate, commonly known as the CAP rate, is a crucial metric for founders to understand when considering real asset investments. It serves as a tool to evaluate the potential return on investment (ROI) from a real estate property, helping founders make informed decisions about where to allocate their resources.
Understanding CAP Rate
The CAP rate is calculated by dividing the net operating income (NOI) of a property by its current market value. This ratio provides an estimate of the expected annual return on investment, expressed as a percentage. A higher CAP rate typically indicates a higher potential return, but it may also suggest higher risk.
Importance for Founders
1. Investment Evaluation: Founders can use the CAP rate to compare different investment opportunities. By assessing the CAP rates of various properties, they can identify which investments offer the best potential returns relative to their risk profiles.
2. Risk Assessment: The CAP rate can also serve as an indicator of risk. Properties with unusually high CAP rates might be located in less desirable areas or require significant maintenance, which could affect their long-term profitability.
3. Market Trends: Monitoring CAP rates can help founders understand market trends. A declining CAP rate in a particular area might indicate increasing property values or a competitive market, while a rising CAP rate could suggest the opposite.
4. Strategic Planning: By understanding CAP rates, founders can better plan their investment strategies, aligning them with their overall business goals and risk tolerance.
Here’s the realistic ballpark right now for California in 2025:
- Prime Areas (e.g., San Francisco, West LA, Silicon Valley):
➔ 4% to 5% cap rates
(sometimes even under 4% for super premium properties) - Secondary/Strong Suburban Areas (e.g., Sacramento, San Diego suburbs, Orange County):
➔ 5% to 6% cap rates - Tertiary/Outlying Areas (e.g., Inland Empire, Central Valley, Bakersfield):
➔ 6% to 7% cap rates
(and sometimes 7%+ for higher-risk or older properties)
Here’s the 2025 breakdown by general property classes in the United States:
| Property Type | Average Cap Rate (2025) |
|---|---|
| Multifamily (Apartments) | 5% – 6% |
| Retail (Shops, Strip Malls) | 6% – 7% |
| Industrial (Warehouses) | 5.5% – 6.5% |
| Office (General) | 7% – 8% (offices are struggling a bit) |
| Medical Office Buildings | 5.5% – 6.5% |
| Triple Net (NNN) Properties | 5% – 6% |
Pro Tips:
- Multifamily and Industrial tend to have the lowest cap rates because they’re seen as safer bets.
- Offices (especially non-medical) have much higher cap rates now because remote work is still shaking up demand.
- Medical offices are holding strong — stable tenants = more reliable returns.