Cap Rate Calculator

What is a cap rate in real estate?

Cap rate (capitalization rate) is the ratio between a property's annual net operating income (NOI) and its purchase price, expressed as a percentage. It measures the unleveraged return an investor would earn from the property's operations alone, ignoring financing. The formula is NOI ÷ purchase price × 100. A property generating $30,000 NOI on a $600,000 purchase has a 5% cap rate.

What is a good cap rate in Canada?

For Ontario residential investment property in 2026, cap rates of 4-5% are typical for Class A urban properties (Toronto, Mississauga, Ottawa) while suburban and small-multifamily often range 5-7%. Northern Ontario, secondary markets, and value-add commercial can clear 7-9%. Anything above 8% in a major Canadian metro usually signals risk — deferred maintenance, tenant issues, or location concerns. Your "good" cap rate depends on what risk-free yield you can earn elsewhere; many investors target 200-400 basis points above the 5-year GIC or government bond rate.

How do I calculate net operating income?

NOI = effective gross income minus operating expenses. Effective gross income is your total potential rent multiplied by (1 minus vacancy rate). Operating expenses include property tax, insurance, maintenance, property management fees, utilities you pay, and routine reserves — but NOT mortgage interest, principal, depreciation, or capital improvements. NOI is the income the property generates regardless of how it's financed.

Does cap rate include the mortgage?

No. Cap rate intentionally excludes financing because it's a property-level measure, not an investor-level measure. To compare unlevered investment returns across multiple properties, you use cap rate. To analyze your personal cash flow including mortgage payments, you use cash-on-cash return. The same property can have a 5% cap rate and a 12% cash-on-cash return at 25% down with 5% interest.

What expenses go into operating expenses?

Standard Canadian residential operating expenses: property tax, building insurance, maintenance and repairs, property management fees (typically 8-10% of rent), utilities paid by landlord (heat, water, hydro if included), advertising and tenant placement, professional fees (accounting, legal), and routine reserve for replacements. Excluded: mortgage payments (any portion), capital improvements (new roof, HVAC replacement), depreciation, your own time. As a rule of thumb, Ontario residential opex runs 30-40% of gross rent for self-managed and 35-45% for fully-managed.

How is cap rate different from ROI?

Cap rate is unlevered and ignores the time value of money — it's a single-year operational yield on the full purchase price. ROI is broader: it can include cash flow, principal paydown, appreciation, and tax benefits across multiple years, expressed as a percentage of cash invested (not purchase price). For a leveraged investment, ROI is typically much higher than cap rate because you only put 20-25% down but capture 100% of property appreciation. Use cap rate for comparing properties, ROI for measuring your own return.

What is a 7.5% cap rate?

A 7.5% cap rate means the property generates 7.5% annual net operating income relative to its purchase price. On a $1,000,000 property, that's $75,000 in NOI. In 2026 Canadian markets, 7.5% is on the higher end — typical of small multifamily in mid-size Ontario cities (Hamilton, Kitchener, London) or commercial properties in secondary markets. It signals more income but typically more risk: tenant turnover, deferred maintenance, or location concerns. Trophy properties in downtown Toronto trade at 3.5-4.5%; a 7.5% deal in downtown Toronto would be a red flag.

Is 5% a good cap rate?

In Ontario in 2026, 5% is a typical cap rate for residential investment properties in major urban centres — Toronto suburbs, Mississauga, Oakville. It signals a balanced trade-off: meaningful unleveraged yield with manageable risk. Whether 5% is good depends on your benchmark. Compared to a 5-year GIC (~4-5%), it's marginal once you factor in management time. Compared to S&P/TSX dividend yield (~3%), it's attractive. For real estate to outperform passive alternatives, you typically need 5%+ cap rate plus appreciation plus mortgage paydown — not cap rate alone.

What does a 3% cap rate mean?

A 3% cap rate means low yield but typically signals high asset quality, prime location, and strong appreciation expectations. Downtown Toronto condos and trophy commercial buildings trade at 3-4% cap rates because investors expect significant capital appreciation to make up for the modest annual income. The danger of buying at a 3% cap rate is that if appreciation slows or interest rates rise, you're holding a property whose income barely covers operating costs. Sophisticated investors evaluate 3% deals on total return (cap rate + projected appreciation + leverage), not yield alone.

What is a good cap rate for beginners?

For new real estate investors in Ontario, target 5-6% cap rate on small residential or small multifamily as a balance of yield, manageable property complexity, and reasonable financing terms. Below 4% requires sophisticated underwriting and typically appreciation-driven thesis (high-risk for beginners). Above 7% in Ontario usually signals problems — distressed property, tough tenant base, or location issues that demand experienced operators. Beginners do best with stable single-family or duplex investments where cap rate is the secondary metric and steady cash flow plus mortgage paydown drives most of the long-term return.