Cap Rate Calculator

The capitalisation rate (often shortened to cap rate) is the most widely used yield measure in rental real estate. It expresses annual net operating income (NOI) divided by property value, as a percentage. It is essentially the return a cash buyer would get in year one, before any mortgage financing. The higher the rate, the more income the asset throws off per dollar invested, but also typically the more risk or potential depreciation.

Formula and worked example

Formula: cap rate = annual NOI ÷ property value × 100. Example: a $500,000 rental condo generates $30,000/year in gross rent, with 5% vacancy and $8,000 in annual operating expenses (tax, insurance, management, maintenance). Effective gross income = $30,000 × 0.95 = $28,500. NOI = $28,500 − $8,000 = $20,500. Cap rate = $20,500 ÷ $500,000 = 4.10%. At this magnitude, a cap rate of 4 to 5% is typical of major Canadian urban centres.

Canadian benchmarks by city (2025-2026)

• Toronto, Vancouver: roughly 3 to 4% (low cap rate, hot markets with strong appreciation expectations)
• Montreal, Ottawa: roughly 4 to 6% (balanced markets, reasonable current yield)
• Calgary, Edmonton, Winnipeg: roughly 5 to 7% (higher current yield, more modest appreciation)
• Halifax, Moncton, Saint John, St. John's: roughly 6 to 9% (Atlantic markets, strong income component)

These benchmarks are approximate averages for multifamily residential and rental condos. Commercial, industrial, and small multi-unit segments have different ranges.

Cap rate vs cash-on-cash vs IRR

The cap rate ignores financing: it is an unlevered yield. Cash-on-cash divides post-mortgage cash flow by your equity invested — it captures leverage but is still an annual snapshot. Internal rate of return (IRR) models the entire holding period including equity build-up from amortization, appreciation, and resale. Cap rate is used to quickly compare assets at a point in time; cash-on-cash shows your real cash yield; IRR captures full project profitability. All three tell part of the story.

Why cap rate excludes financing

Cap rate is designed as a measure of the asset's intrinsic quality, independent of financing structure. Two buyers can purchase the same property with very different mortgages, but the property itself generates only one NOI. By excluding debt service, cap rate lets you compare buildings to each other without financing differences clouding the picture. To measure your personal post-mortgage return, use cash-on-cash or IRR.

Going-in vs market vs going-out cap rate

The going-in cap rate is what you obtain on the day of purchase, based on in-place NOI. Market cap rate is what recent comparable sales of similar assets in the same area imply. Going-out (or exit) cap rate is what you apply to projected NOI at resale, typically used to estimate exit price in an IRR calculation. If exit cap rate is lower than entry cap rate, that is called cap rate compression: the asset appreciates without income growth. Conversely, cap rate expansion means a fall in value.

Cap rate limitations

• Vacancy assumption: a cap rate calculated at 0% vacancy overstates real return. Use 5 to 10% for a prudent range.
• Deferred maintenance: older properties may hide major capital expenses (roof, furnace, plumbing) that cap rate does not capture.
• No rent growth: cap rate is a year-1 measure. Lower-cap markets often have more future rent growth.
• Understated operating expenses: a seller may present a flattering cap rate by omitting expenses (vacancy, management, annual repairs).
• No leverage: cap rate says nothing about your cash return once the mortgage is included.