RETrackerA capitalization (“cap”) rate is a property’s net operating income divided by its price: cap rate = NOI ÷ purchase price. It is the unlevered annual yield — what the building would earn you in cash if you paid all cash — and it is the fastest way to compare two properties on equal footing.
What is a cap rate?
The cap rate expresses a property's income as a percentage of its price, ignoring how you finance it. Because it strips out the mortgage, two investors with very different loans will calculate the same cap rate on the same building — which is exactly why it is the standard yardstick for comparing deals and reading a market.The formula
Cap rate = NOI ÷ purchase price. NOI is annual gross rent minus operating expenses (property tax, insurance, maintenance, vacancy, management, and any utilities or condo fees you pay). NOI never includes mortgage payments or income tax.Cap rate calculator
Worked example
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 is $36,720, so the cap rate is $36,720 ÷ $600,000 = 6.1%. If a comparable building down the street is priced at $700,000 with the same NOI, its cap rate is 5.2% — you are paying more for the same income.What is a good cap rate in Canada?
There is no single “good” number — cap rates track local demand, interest rates and perceived risk. As a rough guide, prime multi-unit properties in Toronto, Vancouver and Montréal often trade at 4–5%, mid-size cities at 5–6.5%, and smaller or higher-risk markets at 7%+. A higher cap rate means more income per dollar of price, but often more risk or work. Always benchmark against recent sales of similar buildings nearby, not a national average.Cap rate vs cash-on-cash return
Cap rate is unlevered; cash-on-cash is levered. Cap rate answers “how does this building yield?” while cash-on-cash answers “what does my invested cash earn after the mortgage?” When your borrowing cost is below the cap rate, leverage lifts your cash-on-cash above the cap rate; when it is above, leverage drags it down.Limitations
- Cap rate is a single-year snapshot — it says nothing about appreciation or paydown (that is IRR).
- It is only as good as your NOI. A seller's pro-forma that understates vacancy or repairs inflates the cap rate.
- It ignores financing, so it cannot tell you whether a deal cash-flows for you specifically.
Frequently asked questions
Does cap rate include the mortgage?
No. Cap rate is deliberately unlevered — it uses NOI, which excludes mortgage principal and interest. That is what lets you compare buildings regardless of financing.
Is a higher cap rate better?
Higher means more income per dollar of price, but it often signals more risk, a weaker location, or more management. Balance cap rate against the quality of the asset and the market.
How do I find NOI?
Take annual gross rent and subtract all operating expenses: property tax, insurance, maintenance, a vacancy allowance, management, and any utilities or condo fees you cover. Do not subtract the mortgage.
What is the difference between cap rate and ROI?
Cap rate is a specific, unlevered yield (NOI ÷ price). “ROI” is a loose term that can include leverage, appreciation and taxes. For rentals, use cap rate, cash-on-cash and IRR instead of a vague ROI.
Keep reading
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.
How to analyze a rental deal
The four numbers every Canadian investor runs before buying.
Sources
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