Cap rate and cash-on-cash aren't the same question
Cap rate (net operating income ÷ price) tells you how the property performs on its own, regardless of how you financed it — good for comparing properties against each other, or against other investment options entirely. Cash-on-cash return (annual cash flow ÷ actual cash invested) tells you how your specific financing choice is performing — good for judging your own deal, since the same property can look very different depending on your down payment size and mortgage rate. A property can have a healthy cap rate and still bleed cash every month if the mortgage payment is high relative to the loan size, which is common right now with rates well above where many cap rates sit, sometimes called "negative leverage" — borrowing at a rate higher than the return the money generates.
Why negative cash flow doesn't automatically mean a bad investment
A property that costs you money every month can still make sense as an investment if the appreciation and mortgage paydown over time outweigh the ongoing cash shortfall — some investors deliberately accept negative cash flow in strong-appreciation markets, treating the monthly shortfall as the cost of building long-term equity. That said, it's a meaningfully riskier strategy than owning something that covers its own costs, since it depends on continued price growth rather than the property paying for itself, and it requires you to have the ongoing cash flow elsewhere to cover the shortfall for as long as you hold it.
Why these categories match the CRA's T776 form
These expense categories mirror the CRA's T776 (Statement of Real Estate Rentals) form on purpose, so if the numbers work out, you're already most of the way to your rental income tax filing next spring. A few things worth knowing: only the interest portion of your mortgage payment is deductible against rental income, not the principal, which is why this calculator tracks the full mortgage payment separately from the deductible expense categories. Capital Cost Allowance (depreciation) is a further deduction some landlords claim, but it reduces your adjusted cost base and can trigger recapture (additional tax) when you eventually sell — it's a more advanced strategy this calculator doesn't model, worth discussing with an accountant if you're holding long-term.
The vacancy allowance matters more than people expect
A 3-5% vacancy allowance might look like a rounding error, but over a typical holding period it represents real months of lost rent between tenants, plus the time and cost of finding new ones. Underestimating vacancy is one of the most common ways new landlords end up surprised by weaker-than-expected returns, especially in markets with longer average time-to-lease or highly seasonal rental demand.
Already own the property and financing it? Check the mortgage payment and see how home equity could fund the down payment on this one.