How to Compare Cap Rates Across Different Property Types

A few years back I looked at two deals on the same Saturday afternoon: a single-family house listed at 32,000,000 yen showing a 5.8% cap rate, and a small eight-unit apartment building at 68,000,000 yen advertised at 9.4%. On paper the apartment building looked like the clear winner. It wasn’t, and figuring out why taught me more about cap rates than any spreadsheet formula ever did.

Across my 9 rental properties I own houses, a duplex, and one small apartment building, and I’ve learned that a cap rate only means something once you know what’s hiding inside the number. Comparing a 5% cap rate on a house to a 9% cap rate on an apartment building without adjusting for property type is one of the fastest ways to overpay for cash flow that never actually shows up in your bank account.

What a Cap Rate Actually Tells You (and What It Doesn’t)

A cap rate is just net operating income divided by purchase price, which sounds simple until you realize every seller calculates net operating income a little differently. On my own properties I use a 5% vacancy assumption and I always include a line for capital reserves, even though most listing sheets I get from agents skip that entirely. When I re-ran the numbers on that 9.4% apartment building using my own assumptions instead of the seller’s, the real cap rate dropped to about 6.9%. That’s still decent, but it’s not the number on the flyer.

Houses vs Small Apartment Buildings

Single-family houses tend to run a lower expense ratio, usually somewhere around 20-25% of gross rent once you count property tax, insurance, and management fees. Small apartment buildings run heavier, often 35-45%, because you’re paying for shared hallway lighting, water pump maintenance, trash collection for the whole building, and more frequent turnover cleaning between tenants. On one of my duplexes the expense ratio sits at 24%. On my eight-unit building it’s closer to 41%. If you compare the headline cap rates without adjusting for that gap, the apartment building will almost always look artificially strong.

Residential vs Commercial Cap Rates

I also own one small commercial unit, a ground-floor shop space I rent out on a near triple-net basis where the tenant covers most repairs and property tax gets passed through. That property shows a 7.1% cap rate, but it’s not doing the same job as a 5.2% cap rate on a residential unit where I’m covering every repair myself. A commercial tenant on a 10-year lease with almost no landlord obligations is a fundamentally different risk than a residential tenant who might move out after 18 months and leave you with a full repaint and floor replacement. Line up the lease structure before you line up the percentages.

Adjusting for Building Age and Maintenance Load

Age changes the math more than most buyers expect. On properties built within the last 15 years I budget roughly 15,000 yen per unit per month toward a capital reserve. On anything older than 30 years, especially wood-frame houses like several of mine, I budget closer to 35,000 yen per unit per month because water heaters, roofing, and plumbing all start failing around the same window. A 25-year-old apartment building advertising an 8% cap rate might really be closer to 6% once you fund a realistic reserve instead of assuming nothing breaks for the next decade.

A Simple Checklist I Use Before Comparing Two Properties

Whenever I’m weighing two listings side by side, I run through the same short list before trusting either cap rate:

• Recalculate net operating income using my own vacancy assumption, not the seller’s
• Normalize the management fee to the same percentage across both properties
• Add a capital reserve line even if the listing sheet has none
• Check the building age and last major renovation date
• Confirm whether the lease is residential, near triple-net, or full commercial
• Compare price per square meter, not just the cap rate, as a sanity check

Once I run both properties through that same checklist, the gap almost always shrinks. That 9.4% apartment building and 5.8% house from a few years ago ended up about 1.2 percentage points apart once I normalized everything, which was a much more honest comparison than the raw listing numbers ever gave me.

That’s the approach I use across all 9 of my properties before I ever sign a purchase agreement, and it’s saved me from a couple of deals that looked great on paper but would have been mediocre in real life.

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