What is a good cap rate?

It depends on the market and risk. Prime properties in strong cities may trade at lower cap rates, while higher cap rates often come with older buildings or riskier locations. Compare within the same market.

Does cap rate include my mortgage?

No. Cap rate is based on net operating income, which excludes mortgage payments. That is deliberate, so you can compare properties regardless of how each one is financed.

Why do cap rates fall when prices rise?

Because cap rate is NOI divided by price. If income stays flat but the price climbs, the ratio drops. Falling cap rates often signal a hot market where buyers accept lower yields.

Mortgage Glossary

What is Capitalization Rate (Cap Rate)?

The capitalization rate, or cap rate, is a property's net operating income divided by its value or purchase price, expressed as a percentage. It estimates the annual return an investment property generates before financing. A higher cap rate suggests more income relative to price, while a lower one signals a richer price or lower yield.

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Quick answer

Also known as: capitalization rate, cap rate

Key points

Cap rate equals net operating income divided by property value or price.
NOI excludes mortgage payments, so cap rate is financing-neutral.
A higher cap rate means more income relative to price.
Lower cap rates often reflect lower risk and higher prices.
Use cap rate alongside cash flow and the gross rent multiplier, not alone.

Capitalization Rate (Cap Rate) explained

Cap rate is calculated as net operating income (NOI) divided by property value, then multiplied by 100 to give a percentage. NOI is the rental income left after operating expenses such as property tax, insurance, maintenance, management, and vacancy, but before any mortgage payments. Because it excludes financing, cap rate lets investors compare properties on an even footing regardless of how each is financed.

In Canada, cap rates vary by city, property type, and risk. Stable properties in strong markets tend to trade at lower cap rates, reflecting lower perceived risk and higher prices, while higher cap rates often come with more risk or older buildings. Cap rate is a snapshot, not a full picture, and is best used alongside other measures like cash flow and the gross rent multiplier.

What a Capitalization Rate (Cap Rate) is for

Cap rate exists to give investors a quick, financing-neutral way to compare the income potential of different properties. It standardizes return into a single percentage, helping you judge whether a property's price is reasonable relative to the income it produces.

How it can help you

Cap rate helps you screen deals fast and spot when a property is over- or under-priced relative to its income. Because it ignores financing, you can compare candidates before deciding how to fund them. Once you choose a property, Lenderoo shops 40+ lenders for free to help you qualify for an investment-property mortgage on terms that protect your cash flow.

When it comes up

Cap rate comes up when an investor compares two rental buildings at similar prices. The one producing more NOI shows a higher cap rate, signalling a better income return, which helps the investor decide where to put their down payment and pursue financing.

Example: calculating a cap rate

A rental property is priced at $500,000. It brings in $36,000 a year in gross rent. Operating expenses, including property tax, insurance, maintenance, management, and a vacancy allowance, total $12,000 a year, leaving a net operating income of $24,000.

Cap rate equals NOI divided by price: $24,000 divided by $500,000 equals 0.048, or 4.8%. If a comparable property at the same $500,000 price produced $30,000 of NOI, its cap rate would be 6.0%, signalling a stronger income return for the same outlay.