A $650,000 rental that brings in $3,600 a month, with a 4% vacancy and $9,700 a year in costs, earns $31,772 in net operating income. That is a cap rate of 4.89%. To reach a 5.5% cap rate on the same income, the price would need to fall to about $577,700.
What a cap rate is
The capitalization rate is yearly net operating income divided by the price. It shows a property’s return as if you had paid cash. Investors use it to compare buildings quickly, with no mortgage in the way.
How the income is built
The calculator starts with a full year of rent and removes the share lost to vacancy. What remains is the income you collect. It then subtracts property tax, insurance, repairs, management and condo fees, and the result is net operating income.
What is left out
The mortgage, income tax and large one-off repairs such as a new roof are not counted. That keeps the number about the property, not about how you paid for it. Two buyers with different loans get the same cap rate, which is exactly why investors like the measure for a first comparison of several buildings.
Reading the number
A higher cap rate means more income per dollar of price, and often more risk. In large Ontario cities prices are high against rent, so rates of 3% to 5% are common. Smaller towns often show more. Compare like with like.
Finding the price you can pay
Enter the rate you need in the last field. The calculator divides the net income by it, which gives the highest price that meets your target. Use it as an anchor for an offer. Check the rent and costs first.
Testing your assumptions
Small changes in vacancy and repairs move the result. The table shows the cap rate at prices from 10% lower to 10% higher. Try a higher vacancy and a bigger repair budget to see how safe the return is.
Cap rate in Toronto and Ontario
Toronto condos often sit near 3% to 4%, because prices rose faster than rents. Small Ontario cities such as London, Hamilton and Sudbury tend to show higher rates, often above 5%. A higher rate can come with lower growth and slower resale, so weigh each area against its own local sales before you decide.
Common mistakes
Many buyers take the seller’s numbers for repairs, vacancy and property tax. Ask for the real tax bill, the insurance quote and a list of past repairs. Older buildings need more. Management fees get skipped too, even by owners who run the unit themselves, though their time has value.
Cap rate and value
Appraisers and investors often value income property by dividing its income by a market cap rate. If similar buildings sell at 5% and yours earns $31,772, its value is about $635,000. The method breaks down when income is unstable or a building needs major repairs. Treat it as a sanity check next to recent sales.
Where to go next
Add a mortgage in the cash-on-cash return calculator or the full rental property calculator. Compare the return with other choices in the ROI calculator. Test your loan in the mortgage calculator.
Frequently asked questions
What is a good cap rate?
It depends on the city and the risk. In large Ontario cities, 3% to 5% is common.
How do I calculate cap rate?
Divide net operating income by the purchase price.
Does cap rate include the mortgage?
No. It shows the return without financing.
What is net operating income?
Rent collected minus operating costs, before mortgage and income tax.
Is a higher cap rate better?
It shows more income per dollar, but it can come with more risk.
How do I find a price from a cap rate?
Divide the net operating income by the rate.
Sources and updates
Last reviewed: . Full disclaimer. How we build calculators. Editorial policy.
Estimate only. This calculator gives general information for planning. It is not tax, legal or financial advice, and it is not affiliated with the City of Toronto, MPAC or the Canada Revenue Agency. Results depend on the numbers you enter and may differ from official amounts. Check official sources or a qualified professional before you decide.