What is Cap Rate?
Capitalization rate (cap rate) measures a rental property's potential return independent of financing. It's calculated by dividing the Net Operating Income (NOI) by the property's value or purchase price. A higher cap rate generally indicates higher potential return — but also higher risk.
How to Calculate Cap Rate in Canada
Walk through the formula step by step:
- Step 1: Calculate your annual gross rental income
- Step 2: Subtract annual operating expenses (property tax, insurance, maintenance, management fees) — do not include mortgage payments
- Step 3: This gives you NOI
- Step 4: Divide NOI by the property purchase price
- Step 5: Multiply by 100 to get your cap rate percentage
What's a Good Cap Rate for Ontario Rental Properties?
Cap rates in Ontario vary significantly by market. Toronto core properties often trade at 3–4% cap rates due to high appreciation expectations. Secondary Ontario markets like Hamilton, London, or Windsor may see 5–7% cap rates. Cap rate alone doesn't tell the full story — cash flow, financing terms, and long-term appreciation all matter.
Cap Rate vs. Cash-on-Cash Return
Cap rate ignores your mortgage — it measures property performance independent of how you financed it. Cash-on-cash return measures your actual cash yield on the cash you invested, including mortgage payments. Both metrics together give a more complete picture of a deal.