What’s a 4.89% cap rate worth? That’s what a $650,000 rental gives at $3,600 a month, with the default costs and 4% vacancy. It comes from $31,772 of net operating income divided by the price.
What does a cap rate tell you?
It’s a year of income from a property, shown as a share of its price. How you pay for the place doesn’t enter into it, so a cash buyer and someone with a big loan see the same figure. That makes it handy for lining up two buildings before a lender gets involved.
The income used is net operating income, or NOI. Start with twelve months of rent, take off vacancy, then subtract property tax, insurance, repairs, condo fees and any management fee. Loan payments and income tax stay out.
| Price | Cap rate at the same income |
|---|---|
| $585,000 | 5.43% |
| $617,500 | 5.15% |
| $650,000 | 4.89% |
| $682,500 | 4.66% |
| $715,000 | 4.44% |
How is the default cap rate calculated?
Twelve months of rent is $43,200. With 4% vacancy you collect $41,472. Operating costs are $5,200 of property tax, $1,500 of insurance and $3,000 of repairs, so $9,700 in all. That leaves $31,772 of NOI, and dividing by $650,000 gives 4.89%.
Now set vacancy to 8%. Rent after vacancy falls to $39,744, NOI becomes $30,044 and the cap rate drops to 4.62%. Doubling the vacancy allowance costs you 0.27 of a percentage point, which is less than most people expect.
You can also run it backwards. Say you want a 5.5% cap rate on this income: the price would have to be $577,673. That’s $72,327 under the asking price, a number worth having in your pocket before you make an offer.
Where do people slip up?
By leaving costs out. Skip repairs or vacancy and the rate looks better than the building really is. Use your own numbers for tax and insurance, always budget for repairs, and keep the same vacancy and repairs assumptions across every listing you compare, so the differences come from the buildings and not from your inputs.
A high cap rate isn’t automatically good. It often points to an older building, a weaker area or more risk. A low one may reflect a strong area where prices are expected to rise. And the figure says nothing about your mortgage, so a property can show a decent cap rate and still lose cash every month after the loan payment. A new roof or another large job isn’t in there either.
What should you check after the cap rate?
When the rate looks fine, test the deal with a loan. The cash-on-cash return calculator shows what you pocket each year after mortgage payments, and the rental property calculator adds price growth and a holding period. For a general profit ratio there’s the ROI calculator, and for the payment itself the mortgage calculator.
Where do the numbers come from?
Everything on this page is arithmetic on what you enter. The defaults are planning values, not market data, and we don’t claim any rent, vacancy or cost level is typical. Look up real rents nearby, get the actual tax bill and ask for insurance quotes. This website has no connection with the CRA or any government body, and the result is an estimate, not advice.
Frequently asked questions
How do you work out a cap rate?
Take a year of income after costs and divide it by the price. The default is $31,772 over $650,000, which gives 4.89%.
Is the mortgage counted?
No. Loan payments, income tax and large one-off repairs are left out, so the rate describes the property and not your financing.
What counts as income here?
Rent collected after vacancy, less property tax, insurance, repairs, condo fees and management. The default result is $31,772.
How does vacancy change the result?
Raising vacancy from 4% to 8% lowers the default cap rate from 4.89% to 4.62%.
Can I find a price for the yield I want?
Yes. Enter your target rate. At 5.5%, the default income supports a price of $577,673.
Sources and updates
Updated: . How we check rates · Editorial team · Updates
Estimate only. These figures are a planning estimate, not tax, legal or accounting advice. Tax-Services.ca is an independent publisher: we don't prepare or file tax returns, and we don't offer tax, legal or accounting services. We have no connection with the Canada Revenue Agency, Revenu Québec or any provincial government. Your real amounts depend on details this tool cannot see, so confirm them with an official source or a qualified professional before you act.