# Cap Rate Calculator for a Rental Property

> Work out a rental's capitalization rate from its price, rent, vacancy and yearly costs, and the price that would give the yield you want

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 formula is the standard one, [annual net operating income divided by current value](https://en.wikipedia.org/wiki/Capitalization_rate), and nothing about it is special to Canada.

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.

Here's one that catches people. Suppose a property manager charges 8% of the rent you collect. On $41,472 that's $3,318 a year, so NOI falls to about $28,454 and the cap rate to 4.38%. Self-managing looks like free money until you count your own Saturdays.

## 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.

## Is cap rate the same as my return?

No. Cap rate describes the building, and your return depends on how you bought it. On the default numbers, the 4.89% figure stays the same whether you pay cash or borrow. But with a $26,953 yearly mortgage payment (the loan used on the cash-on-cash page), what you keep is only $4,819 a year before income tax. Two different questions, two different answers.

It's also a snapshot. Rents and costs move, so a cap rate worked out today is a ballpark for next year, not a promise.

## 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](https://tax-services.ca/calculators/real-estate/cash-on-cash-return) shows what you pocket each year after mortgage payments, and the [rental property calculator](https://tax-services.ca/calculators/real-estate/rental-property) adds price growth and a holding period. For a general profit ratio there's the [ROI calculator](https://tax-services.ca/calculators/math-business/roi-calculator), and for the payment itself the [mortgage calculator](https://tax-services.ca/calculators/mortgage/mortgage-calculator).

## Our sources

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.

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Source: https://tax-services.ca/calculators/real-estate/cap-rate
Last updated: 2026-10-09
Independent information site. Not affiliated with the CRA. No services, no guarantee of accuracy. See https://tax-services.ca/disclaimer