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