Cap rate + cash-on-cash
Capitalization rate is unlevered yield on a property. Cash-on-cash applies your mortgage and shows what return your actual cash earns. Both matter; they tell different stories.
Your scenario
Result
Cap rate ignores capex reserves. Add a maintenance/repairs reserve to expenses for a realistic view.
Cap rate explained
Capitalization rate (cap rate) = Net Operating Income ÷ Property Price. It's the unlevered yield on the property — what return you'd earn if you paid all cash. Cap rate ignores financing entirely, making it the cleanest metric for comparing properties.
What counts as NOI
Net Operating Income = gross rent minus all operating expenses (property tax, insurance, management, maintenance reserve, utilities the owner pays). NOI does NOT include mortgage payment, depreciation, capital improvements, or income tax. The formula is intentionally finance-blind so it comparisons across investors work.
Typical Canadian cap rates
| Market type | Typical cap rate |
|---|---|
| Tier-1 condo (Toronto core, Vancouver core) | 2.5-4% |
| Tier-1 SFH (Toronto, Vancouver suburbs) | 3-4.5% |
| Tier-2 city (Calgary, Edmonton, Ottawa, Halifax) | 4-6% |
| Tier-3 / secondary (Saskatoon, Hamilton, Windsor) | 5.5-8% |
| Small multi-family (3-12 units) | 5-8% |
| Commercial / retail strip | 5.5-8% |
Cash-on-cash adds leverage
Cash-on-cash return = Annual Cash Flow ÷ Cash Invested. Where cap rate ignores financing, cash-on-cash includes it — showing what return YOUR money earns. With 25% down at a 5% mortgage rate on a 5% cap rate property, cash-on-cash typically lands at 6-9%.
Which to use when
- Comparing properties: cap rate (apples to apples)
- Deciding whether to deploy your capital: cash-on-cash
- Both, for the full picture: cap rate + cash-on-cash + 5-year IRR projection
What both metrics miss
- Appreciation — neither captures the equity build from rising property values
- Capex reserves — properly accounting for roof / HVAC / windows / appliances replacement
- Lumpy vacancy — averaged into expenses but real vacancy is binary (occupied or not)
- Refinance optionality — pulling equity out later changes the cash-on-cash math
Related
Questions about this calculator
- What is a good cap rate for a Canadian rental property?
- It depends entirely on the market. Major-city residential often trades between 3% and 5%, while smaller markets and commercial can reach 6% to 8%. A high cap rate is compensation for risk, not a free lunch — ask what the market knows that you do not.
- How is cap rate calculated?
- Net operating income divided by property value. NOI is gross rent minus operating expenses — tax, insurance, maintenance, management, vacancy — but crucially NOT the mortgage payment. Cap rate measures the property, independent of how you financed it.
- What is the difference between cap rate and cash-on-cash return?
- Cap rate ignores financing and measures the asset. Cash-on-cash divides your annual pre-tax cash flow by the cash you actually put in, so it reflects leverage. A property can have a mediocre cap rate and a strong cash-on-cash return, or the reverse.
- Should I include my own labour in the expenses?
- Yes, if you want an honest number. Self-managing is a real cost you are absorbing, and leaving it out flatters the return and makes properties look comparable when they are not. Price it at what a manager would charge, typically 8% to 10% of rent.