Cap Rate & Return

Cap rate strips the financing out of a rental property and asks one question: what does this building earn on its price? A 5% cap rate means the property's net operating income equals five cents per dollar of purchase price each year. Investors use it to compare a Halifax triplex with a Toronto condo on equal footing. This calculator also shows cash-on-cash return — what your actual invested dollars earn after the mortgage is paid.

What this calculator answers

It computes the capitalization rate — net operating income divided by purchase price — and, with your down payment and closing costs, the cash-on-cash return: cash left after debt service divided by total cash invested. Cap rate compares properties; cash-on-cash measures your money's performance in the deal you are considering.

What it deliberately does not cover

Cap rate is deliberately blind to financing, and this calculator preserves that blindness. It does not include income tax, appreciation, or risk differences between markets — a 7% cap rate in a shrinking town and a 4% cap rate in a growing city are not the same investment. It does not estimate capital gains tax or CCA recapture at sale. And it treats your expense inputs as correct.

Every input, explained

Purchase price. Enter the price you pay. The common error is inconsistency: some investors use price alone, others add closing costs. Either is defensible, but compare properties using the same definition or the comparison is meaningless.

Annual gross rent. Enter the full year's scheduled rent. The common error is multiplying one month's rent by 12 — gross rent is the starting point, not the answer, because vacancy comes off next.

Vacancy and credit loss. Enter the percentage of gross rent lost to empty units and unpaid rent. The common error is zero. Subtracting it gives effective gross income — the rent you actually collect.

Operating expenses. Enter property tax, insurance, maintenance, management, and any utilities the owner pays — never the mortgage payment, never income tax. The common error is including debt service, which destroys the point of a financing-blind cap rate. The second is omitting management; price it anyway or you cannot compare against managed alternatives.

Down payment and closing costs (for cash-on-cash). Enter down payment plus land transfer tax, legal fees, and other closing costs for total cash invested. The common error is forgetting that a rental needs 20% down minimum with no mortgage insurance available — your cash-in is far larger than on an owner-occupied purchase.

How the math works

Net operating income equals effective gross income (gross rent minus vacancy) minus operating expenses — everything except financing and income tax. Cap rate is NOI divided by purchase price. Cash-on-cash goes one step further: subtract annual debt service from NOI, then divide by total cash invested (down payment plus closing costs). The first ratio compares buildings; the second evaluates your deal.

Worked example: $520,000 Winnipeg duplex

An investor buys a duplex in Winnipeg for $520,000, with gross rents of $3,200 per month. Expense figures below are example inputs.

Annual gross rent: $3,200 × 12 = $38,400.
Vacancy at 5%: $38,400 × 5% = $1,920. Effective gross income: $38,400 − $1,920 = $36,480.
Operating expenses: property tax $4,200 + insurance $1,400 + maintenance $2,000 + management at 8% of effective rent ($36,480 × 8% = $2,918) = $10,518.
Net operating income: $36,480 − $10,518 = $25,962.
Cap rate: $25,962 ÷ $520,000 = 4.99%.

Now the cash-on-cash return. The rental requires 20% down: $520,000 × 20% = $104,000. Manitoba land transfer tax on $520,000, using the marginal brackets (0% to $30,000; 0.5% to $90,000; 1% to $150,000; 1.5% to $200,000; 2% above; plus $70): $0 + $300 + $600 + $750 + $6,400 + $70 = $8,120. Legal fees of $1,800 (within the typical $1,200–$2,500 range) bring closing costs to $9,920. Total cash invested: $104,000 + $9,920 = $113,920. With annual debt service of $21,600 (example input), cash after debt service is $25,962 − $21,600 = $4,362, and cash-on-cash return is $4,362 ÷ $113,920 = 3.83%.

The building earns 4.99% on its price, but the investor's cash earns 3.83% — the gap is leverage working in reverse at this price and rate.

Provincial quirks and edge cases

The 20%-down-minimum and no-insurance rules for rentals apply in every province and hit cash-on-cash directly through a bigger denominator. Land transfer costs vary enormously and change the cash invested for the same cap rate: on a $600,000 purchase the levy is $9,720 in Manitoba, $8,475 in Ontario outside Toronto, $16,950 in Toronto, and just $1,180 in Alberta — identical buildings at identical prices produce different cash-on-cash returns by province. Vacancy taxes can dent NOI too: Toronto's 3% vacant home tax applies to assessed value for units deemed vacant (owners must declare occupancy yearly), and BC's speculation and vacancy tax reaches 3% for foreign owners and 1% for Canadian citizens and permanent residents on declarations made in 2027.

Questions to ask a professional

Realtor or appraiser: Is my rent estimate realistic — what are comparable units actually leasing for right now?
Property manager: Which operating expenses am I underestimating for this building type and age?
Mortgage broker: At 20% down with no insurance available, what is my annual debt service at current rates?
Tax professional: How do NOI, CCA claims, and eventual recapture interact — and how does income tax change the return shown here?

Frequently asked questions

What is a "good" cap rate?

There is no universal number. Cap rates reflect local risk, growth expectations, and interest rates — compare within the same city and property type, never across markets. A higher cap rate usually means higher perceived risk, not a better deal.

Why does the cap rate exclude the mortgage?

So properties can be compared regardless of financing. Two buyers with different down payments see the same cap rate on the same building — financing differences show up in cash-on-cash return instead.

Cap rate versus cash-on-cash — which should I use?

Both. Cap rate tells you whether the building is priced fairly relative to its income. Cash-on-cash tells you what your invested dollars earn given your leverage. A fairly priced building can still be a poor deal for your cash if the financing is expensive.

Does a higher cap rate mean a better investment?

Often the opposite. High cap rates cluster in higher-risk or lower-growth areas — weaker tenant demand, older stock, thinner resale markets. The rate measures income relative to price, not safety.

Should closing costs be included in the price?

Be consistent rather than correct. Some investors use price alone, others use all-in cost. Either works as long as every property is measured the same way — just note which definition you used.

Rules and rates as of September 2026. This is general information for Canadian home buyers and sellers, not financial, legal, or tax advice. Rules and rates change; confirm current figures with your lawyer or notary, your lender, or the government office that administers the tax before relying on them.