Question 1

How do you calculate cap rate?

Accepted Answer

Cap rate is net operating income (NOI) divided by the purchase price. Add up a year of rent, subtract a vacancy allowance and the operating costs (property tax, insurance, repairs, utilities you pay, management), and divide what is left by the price. A $1,000,000 triplex with 3 units at $1,500 a month and $500 a month in expenses has an NOI of $48,000, so its cap rate is 4.8%.

Question 2

What is a good cap rate in Ontario?

Accepted Answer

There is no single good number: cap rates move with interest rates, location and building type. Houses in the GTA often sit under 4% because prices are high relative to rent. Duplexes, triplexes and small apartment buildings across Ontario more often land between 4% and 6%, and smaller markets can be higher. Use cap rate to compare similar properties in the same area rather than chasing one target.

Question 3

Does cap rate include the mortgage?

Accepted Answer

No. Cap rate measures the property’s income against its price as if you paid cash, so two buildings can be compared regardless of how they are financed. To see what you actually keep after mortgage payments, use a cash flow calculator.

Question 4

Is a higher cap rate always better?

Accepted Answer

A higher cap rate means more income for each dollar of price, but it often comes with more risk: an older building, a weaker rental market, below-market rents that are hard to raise, or deferred repairs. A lower cap rate can still be a good buy in a market where rents and values are rising.

Question 5

What expenses go into NOI?

Accepted Answer

Property tax, insurance, repairs and maintenance, utilities the landlord pays, property management, and an allowance for vacancy. Mortgage payments, income tax, depreciation and one-time renovations are not included.

Question 6

Why do 5+ unit buildings get valued on cap rate?

Accepted Answer

Buildings with five or more units are financed and appraised as commercial property, so lenders and buyers value them mainly on the income they produce. Houses and 2–4 unit properties are residential and are usually valued by comparing recent sales of similar homes.

Question 7

Can I add an ADU to raise my cap rate?

Accepted Answer

Often, yes. Ontario allows up to three residential units on most serviced residential lots, for example a main house plus a basement apartment and a garden suite, subject to local zoning and the Building Code. Extra rent raises NOI, but the cost of building the unit should be added to your price when you work out the return.

Question 8

What is the difference between cap rate and cash-on-cash return?

Accepted Answer

Cap rate is NOI divided by the full price. Cash-on-cash return is your cash flow after mortgage payments divided by the cash you put in. Cap rate compares buildings; cash-on-cash shows the return on your own money with your financing.

Property type	Units	Price	Rent/month	NOI/year	Cap rate
Single family	1	$750,000	$3,000	$25,800	3.44%
Townhouse	1	$650,000	$2,800	$24,600	3.78%
Duplex	2	$850,000	$4,000	$40,200	4.73%
House + ADU	2	$950,000	$4,200	$41,400	4.36%
Triplex	3	$1,000,000	$4,500	$48,000	4.8%
Fourplex	4	$1,250,000	$6,800	$64,800	5.18%
6-plex	6	$1,650,000	$9,600	$86,400	5.24%
8 units	8	$2,000,000	$12,400	$110,400	5.52%
12 units	12	$2,900,000	$18,000	$156,000	5.38%

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What is cap rate?

Cap rate by property type in Ontario

Cap rate, cash flow and cash-on-cash

Ontario rules that affect cap rate

Frequently asked questions

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