Cap Rate & Cash-on-Cash Calculator Canada

What the cap rate calculator does

The calculator turns a rental property into the numbers that matter: net operating income, the capitalization rate, the cash flow left after the mortgage, and the cash-on-cash return on the money you put in. Enter the purchase price, gross annual rent, operating expenses, down payment, mortgage rate and amortization, and the tool reports all of them, along with the gross rent multiplier and the debt service coverage ratio a lender will look at.

Two returns are shown because they answer different questions. The cap rate measures how productive the building is, whatever the financing. Cash-on-cash measures how hard your own money is working. A property can look excellent on one and mediocre on the other, and the gap tells you whether leverage is helping or hurting.

How net operating income is built

• Gross annual rent is what the property would collect if every unit were occupied for twelve months at the asking rent.
• Vacancy and credit loss comes off that. Even a well-run building loses days to turnover, and a tenant occasionally does not pay. A realistic allowance, typically 2% to 5% in most Canadian markets, leaves effective gross income.
• Operating expenses are the recurring costs of running the building: property taxes, building insurance, condo or strata fees, any utilities the landlord pays, repairs and maintenance, snow removal and landscaping, property management, and turnover costs.

Effective gross income minus operating expenses is net operating income. Mortgage principal and interest, capital cost allowance and income tax are left out because they depend on your financing and your tax position rather than on the building, which keeps the cap rate comparable between investors.

Reading the capitalization rate

The cap rate is net operating income divided by the purchase price. With the default inputs, a $650,000 duplex with $60,000 of gross rent, a 3% vacancy allowance and $18,000 of expenses produces $40,200 of net operating income, a cap rate of about 6.2%. Read in reverse, the cap rate also prices a building: divide its net operating income by the cap rate comparable properties are trading at, and you get an estimate of its value.

Cap rates vary widely across Canada, mostly because of risk and growth expectations rather than quality. A downtown Vancouver condo may trade at 3.5% because buyers expect appreciation and see the tenant base as stable. A similar building in a small resource town might need to show 8%, because rents there are more volatile and resale is slower. Compare cap rates within the same city and asset class, not across provinces.

Listing agents often quote a cap rate built on optimistic rents, no vacancy allowance and a thin maintenance line. Rebuild the number from figures you can defend, and be wary when the advertised expense ratio is far below the 30% to 40% that most Canadian residential rentals actually run at.

Cash-on-cash return and the effect of leverage

Cash-on-cash return divides the annual cash flow after the mortgage by the total cash invested: the down payment plus closing costs such as land transfer tax, legal fees and inspection. In the example, 25% down on $650,000 plus $18,000 of closing costs is $180,500 invested. After about $33,196 of annual mortgage payments, about $7,004 of cash flow remains, a cash-on-cash return of about 3.9%. Debt service coverage is about 1.21.

Leverage works both ways. When the cap rate is above the mortgage constant (annual debt service divided by the loan amount), borrowing more lifts your cash-on-cash return. When it is below, borrowing more lowers the return and can push cash flow negative. Many Canadian investors have been in that position since rates rose: properties bought at 3.5% cap rates now carry mortgages that cost more than that, so each extra dollar borrowed worsens the monthly cash position even though the building is unchanged.

In the example the mortgage constant is about 6.8%, above the 6.2% cap rate, so more leverage hurts. Change the down payment from 20% to 35% and watch the cash flow and cash-on-cash return move. If the return falls as you put more money down, leverage is working for you; if it rises, it is not.

Debt service coverage and what lenders look at

The debt service coverage ratio is net operating income divided by annual debt service. Below 1.0, the rent does not cover the mortgage and you are subsidizing the property from other income. Most Canadian lenders financing a rental or small multi-unit building want at least 1.10, and commercial lenders on properties with five or more units often require 1.20 to 1.25.

Check this before you make an offer, because a coverage shortfall is usually solved by putting more money down, which changes the economics of the whole purchase.

Using the results sensibly

Run the numbers three times: with the seller’s figures, with your own realistic estimates, and with rents 5% lower and expenses 10% higher. A deal that still works in the third case has a margin of safety. These measures cover operating performance only. They leave out principal repayment building your equity, appreciation, capital cost allowance reducing taxable rental income, and capital gains tax on a sale.

All figures from this tool are estimates based on the numbers you enter, for general information only. They are not tax, legal, mortgage or investment advice. Confirm expenses with actual statements, confirm financing with your lender or mortgage broker, and ask a qualified accountant about the tax treatment of a Canadian rental property before you commit.

About This Tool: Cap Rate Calculator Canada

Cap rate calculator Canada: use this tool to get an instant estimate based on the figures you enter. Adjust the inputs above to match your situation, or browse all our calculators to plan your next step.