Is a Rental Property Worth It? Cap Rate and Cash Flow Explained (2026)
A $500,000 rental at $2,600 a month has a 3.9% cap rate and loses $810 a month with 20% down at 5.5%. What cap rate and cash flow each tell you about the deal.
Two numbers answer two different questions. Cap rate, net operating income divided by price, tells you what the property earns as a business, before financing. Cash flow, rent minus every expense including the mortgage, tells you what it does to your bank account each month. A $500,000 rental bringing $2,600 a month has a 3.9% cap rate; with 20% down at 5.5% it loses about $810 a month. That is typical of Canadian cities in 2026. The property can still be worth owning if principal paydown and appreciation exceed the losses, but that is a bet on the future, not income today.
Figures come from the CostToClose rental cash flow calculator.
Cap rate: the business
| Item | Annual |
|---|---|
| Gross rent ($2,600 × 12) | $31,200 |
| Vacancy allowance (4%) | −$1,248 |
| Property tax | −$4,200 |
| Insurance | −$1,200 |
| Maintenance and repairs (1% of value) | −$5,000 |
| Net operating income | $19,552 |
| Cap rate (NOI ÷ $500,000) | 3.9% |
This example was computed with the CostToClose calculator, 14 September 2026. Add property management (8% to 10% of rent) if you will not self-manage; it takes this cap rate to about 3.3%.
A cap rate below the mortgage rate is the definition of a property that cannot pay for its own financing. Investors in Toronto and Vancouver have been buying 3% to 4% cap rates with 5% mortgages for years, on the theory that price growth covers the gap.
Cash flow: your bank account
| Metric | 20% down | 35% down |
|---|---|---|
| Mortgage | $400,000 | $325,000 |
| Payment at 5.5%, 25 years | $2,442/mo | $1,984/mo |
| NOI per month | $1,629 | $1,629 |
| Cash flow | −$812/mo | −$354/mo |
| Cash invested (down payment + ≈ $15,000 closing) | $115,000 | $190,000 |
| Cash-on-cash return | −8.5% | −2.2% |
| Principal repaid in year 1 | ≈ $7,200 | ≈ $5,900 |
The property is negative either way. Putting more down makes the monthly loss smaller but ties up more cash to earn a lower return on the whole. See Cash-on-cash vs cap rate.
What has to be true for it to work
Total return = cash flow + principal paydown + appreciation − transaction costs. On the 20%-down case, year one is −$9,700 cash flow + $7,200 principal = −$2,500 before appreciation. The property breaks even in year one if it appreciates by about 0.5%, and returns 10% on the $115,000 invested if it appreciates about 2.8%. Whether that is likely in your city is the entire question; no calculator answers it.
Selling costs of 5% to 6% plus capital gains tax mean a rental usually needs to be held five years or more before appreciation covers the round trip.
What changes the number
- Rent. $200 more a month is $2,400 a year straight to NOI and a 0.5% higher cap rate.
- Rate. Each 0.5% on $400,000 is about $115 a month.
- A legal secondary suite. Two rents on one mortgage is how most cash-flow-positive properties in expensive cities are built.
- Condo fees. $450 a month on a condo takes this NOI to $14,150 and the cap rate to 2.8%.
- Taxes. Interest, expenses and CCA are deductible against rental income; losses can offset other income (with limits), which softens the after-tax picture.
Frequently asked questions
What is a good cap rate for a rental property in Canada?
Higher is better for income; 5% to 7% is achievable in smaller cities and multi-unit buildings, 3% to 4% is typical for condos and houses in Toronto and Vancouver. Compare against your mortgage rate: below it, the property cannot carry its own financing.
Why is my rental cash-flow negative?
Because rent has not kept pace with prices: a 3.9% cap rate cannot cover a 5.5% mortgage on 80% of the price. Most single-unit rentals in major Canadian cities are negative at 20% down.
Is negative cash flow always bad?
No, if principal paydown plus realistic appreciation exceeds the loss and you can carry it through vacancies and rate increases. It is a growth investment, not an income one.
How much down payment do I need for a rental?
20% minimum. Mortgage insurance is not available on non-owner-occupied rentals.
Can I use rental income to qualify for the mortgage?
Lenders add 50% to 80% of the rent to your income, or offset it against the payment. See How rental income affects mortgage approval.
Sources
- CMHC, Rental Market Report — vacancy and rent methodology — checked 14 Sept 2026
- Canada Revenue Agency, Rental income guide T4036 — checked 14 Sept 2026
- CostToClose cash flow engine (semi-annual compounding) — 14 Sept 2026
This guide gives general information for Canadian home buyers and sellers, checked against the sources listed above on the date shown. It is not legal, tax, or mortgage advice. Because 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.