Cap rate formula: how to calculate it for a Canadian rental property

Cap rate = net operating income ÷ property value × 100. A property producing $30,900 of NOI on a $650,000 price has a cap rate of about 4.75%. The arithmetic is simple; the judgement is in measuring income, costs and value on the same basis.

Cap rate is an unlevered measure. It describes what the property earns before any mortgage, so two buyers with different financing see the same cap rate on the same property. Use it to compare similar properties in the same market, not as your personal return or an appraisal.

Using a $3,500 monthly rent townhouse: scheduled rent is $42,000 a year. A 5% vacancy and collection allowance removes $2,100, leaving $39,900 effective income. Operating costs of $3,900 property tax, $1,500 landlord insurance, $2,400 repairs and maintenance and $1,200 owner-paid utilities total $9,000. NOI is $30,900.

Add condo or strata fees, property management and leasing costs where they apply. A condo with a $500 monthly fee carries $6,000 a year that a freehold home does not; leaving it out can overstate the cap rate by almost a full percentage point at this price.

Exclude mortgage principal and interest, income tax, capital cost allowance and one-off purchase costs. These matter to your return but not to the property’s operating income. Major capital work such as a roof replacement is also usually kept out of a single year’s NOI and planned through a reserve.

Be consistent. If you deduct a replacement reserve from NOI for one property, do the same for every comparable. Mixing conventions makes a lower-quality property look cheaper than it is.

Actual NOI uses last year’s collected income and real bills. Stabilized NOI estimates a normal year at market rent and typical occupancy. A unit rented well below market under a long-term tenancy may show a low actual cap rate; provincial rent rules may limit how quickly that changes, so do not assume a stabilized figure is immediately achievable.

When a listing quotes a cap rate, ask which basis was used, whether vacancy was included and which expenses were left out.

Use the purchase price to judge an acquisition. Use current market value to review a property you already own: if the same $30,900 NOI property is now worth $700,000, its cap rate on current value is about 4.41%. A falling cap rate on current value can signal that capital is tied up in a property earning comparatively little income.

Gross yield divides annual scheduled rent by price: $42,000 ÷ $650,000 is about 6.46%, before vacancy and costs. Cap rate (4.75%) subtracts operating costs. Cash-on-cash return then subtracts mortgage payments and divides by the cash you actually invested; in our cash-flow example it is only about 0.56%.

Each measure answers a different question. A reasonable cap rate does not prove the property will cover a mortgage at today’s rates.

There is no meaningful single Canadian cap rate. A downtown condo, a suburban duplex and a small-town detached home carry different taxes, fees, insurance, vacancy and growth expectations. Compare against recent, verified local rentals and sales of similar properties, and treat any example rate on this site as illustrative rather than current market data.