RETrackerTo analyze a rental property in Canada, run four numbers in order: net operating income (NOI), then cap rate (the unlevered yield), cash-on-cash return (the return on the cash you actually invest), DSCR (the safety ratio your lender cares about), and IRR (your total return once you sell). If all four clear your targets, the deal is worth a deeper look.
What four numbers actually matter?
Most bad rental purchases come from looking at one number in isolation — usually price, or a headline “rent.” A disciplined underwrite uses four complementary metrics, because each answers a different question:- Cap rate — how the property yields before financing, so you can compare buildings fairly.
- Cash-on-cash — what your invested cash earns each year after the mortgage.
- DSCR — whether the rent comfortably covers the debt (this is what sizes your loan).
- IRR — the blended, time-weighted return including appreciation and the eventual sale.
Step 1 — Estimate net operating income (NOI)
NOI is annual gross rent minus operating expenses, and it excludes the mortgage. Operating expenses in Canada typically include property tax, insurance, maintenance and repairs, a vacancy allowance, property management, utilities you pay, and condo fees. A common rule of thumb is 30–40% of gross rent for a small multi-unit, but always build the number from real line items.Take a $600,000 triplex that rents for $54,000 a year ($1,500 per unit per month). Operating expenses — property tax, insurance, maintenance, a vacancy allowance and management — run about 32% of rent, or $17,280, leaving net operating income (NOI) of $36,720. You put 25% down ($150,000) plus roughly $18,000 of closing costs including the welcome tax, so $168,000 of cash goes in. The $450,000 mortgage at 5.0% over 25 years costs about $31,572 a year ($2,631 a month).
NOI here is $54,000 − $17,280 = $36,720.Step 2 — Cap rate (the unlevered yield)
Cap rate = NOI ÷ purchase price. In our example that is $36,720 ÷ $600,000 = 6.1%. Cap rate ignores your mortgage, so it lets you compare two buildings on equal footing. See the full method in the cap rate guide.Step 3 — Cash-on-cash return
Cash-on-cash = annual pre-tax cash flow ÷ total cash invested. Cash flow is NOI minus debt service: $36,720 − $31,572 = $5,148. Against $168,000 of cash in, that is $5,148 ÷ $168,000 = 3.1%. More detail in the cash-on-cash guide.Step 4 — DSCR (what your lender checks)
Debt-service coverage ratio = NOI ÷ annual debt service = $36,720 ÷ $31,572 = 1.16. Lenders want to see the rent cover the mortgage with a cushion; most commercial and CMHC multi-unit programs look for 1.10 to 1.30. See the DSCR guide.Step 5 — IRR (your total return)
Cap rate and cash-on-cash are single-year snapshots. IRR blends every year of cash flow with the gain when you sell into one annualized figure. Holding our triplex five years with modest 3% appreciation and paying down principal produces an IRR of roughly 12%. Walk through the math in the IRR guide.The full picture on one deal
Put together, our triplex shows a 6.1% cap rate, 3.1% cash-on-cash, a 1.16 DSCR and about a 12% five-year IRR. That is a financeable, slightly cash-flow-positive deal whose return leans on appreciation and paydown rather than day-one cash flow — exactly the kind of trade-off the four numbers make visible.Common mistakes to avoid
- Forgetting the welcome tax and closing costs in your cash-invested figure (it sinks cash-on-cash and IRR).
- Using an optimistic rent with no vacancy allowance.
- Ignoring capital expenditures (roof, windows, furnace) that do not show up in year one.
- Judging a leveraged deal on cap rate alone, or an all-cash deal on cash-on-cash alone.
- Treating mortgage principal as an expense — it is not; it builds your equity.
Frequently asked questions
What is a good cap rate for a rental property in Canada?
It depends on the city and property type. Dense urban multi-units often trade at 4–5% cap rates, while smaller markets can offer 6–8%. Compare against recent local sales rather than a national number, and read cap rate alongside cash-on-cash and DSCR.
Is cash flow or appreciation more important?
Both, which is why IRR exists. Cash-on-cash captures annual cash flow; IRR captures cash flow plus appreciation and principal paydown over your holding period. A deal can be thin on cash flow but strong on IRR, or vice-versa.
What DSCR do I need to get financing?
Lenders vary, but many Canadian commercial and CMHC multi-unit programs look for a DSCR of 1.10 to 1.30. A ratio under 1.0 means the rent does not cover the mortgage.
Do these numbers include income tax?
No. Cap rate, cash-on-cash and DSCR are pre-tax. Your after-tax return depends on your marginal rate and deductions reported on CRA Form T776 — see our rental-income-and-taxes guide.
Keep reading
Cap rate
The unlevered yield: NOI divided by price.
Cash-on-cash return
The cash return on the actual cash you invest.
DSCR
The ratio lenders use to size your loan.
IRR
Your total time-weighted return, including the sale.
Sources
- CMHC — Rental Market Report
- Bank of Canada — interest rates
- CMHC — MLI Select (multi-unit mortgage insurance)
- CRA — Completing Form T776, Statement of Real Estate Rentals
Stop underwriting deals in spreadsheets.
RETracker tracks equity, rent and cash flow across your portfolio and underwrites your next deal with Canadian math. 14-day free trial.