What Is a Good Cap Rate in Canada?
Quick Answer
What Is a Good Cap Rate in Canada?
A good cap rate in Canada depends on market and property type. Residential cap rates typically range from 3 to 5% in Toronto/Vancouver to 5 to 8% in Calgary, Edmonton, and Atlantic Canada. Commercial properties offer 6 to 10%. Higher cap rates mean higher returns but may indicate higher risk or lower-quality markets. A good cap rate aligns with your investment goals.
Detailed Explanation
What Is a Good Cap Rate in Canada?
A cap rate (capitalization rate) is the rate of return on a real estate investment property based on the income it generates. It's the most common metric for comparing income-producing properties.
The Cap Rate Formula
Cap Rate = Net Operating Income (NOI) / Property Value (or Purchase Price)
Where:
- NOI = Annual rental income - operating expenses (excluding mortgage payments)
- Property Value = Purchase price or current market value
What Makes a "Good" Cap Rate?
A good cap rate depends on three factors: market, property type, and your investment goals.
By Canadian Market
| Market | Typical Cap Rate | Market Character |
|---|---|---|
| Toronto | 3.0 to 4.5% | High prices, strong appreciation, lower yields |
| Vancouver | 2.5 to 4.0% | Highest prices, lowest yields, strongest appreciation |
| Ottawa | 4.0 to 5.5% | Stable, government-driven economy |
| Montreal | 4.5 to 6.0% | Affordable, strong rental demand |
| Calgary | 5.0 to 7.0% | Affordable, good yields, energy-dependent |
| Edmonton | 5.5 to 7.5% | Very affordable, strong cash flow |
| Winnipeg | 6.0 to 8.0% | Affordable, higher yields |
| Halifax | 5.0 to 7.0% | Growing market, good yields |
| Atlantic Canada | 6.0 to 9.0% | Most affordable, highest yields |
By Property Type
| Property Type | Typical Cap Rate |
|---|---|
| Single-family rental | 4 to 6% |
| Multi-family (2 to 4 units) | 5 to 7% |
| Apartment building (5+ units) | 4 to 6% |
| Retail strip plaza | 6 to 8% |
| Office space | 6 to 9% |
| Industrial/warehouse | 6 to 8% |
Interpreting Cap Rates
- Higher cap rate (>7%): Higher cash return, potentially higher risk, often in secondary markets
- Moderate cap rate (4 to 7%): Balanced return, stable markets, common for residential
- Lower cap rate (<4%): Lower cash return but strong appreciation potential, typically Toronto/Vancouver
Cap Rate vs. Cash-on-Cash Return
Cap rate measures the property's unlevered return (no mortgage). Cash-on-cash return measures your actual return on invested cash (with mortgage). A property with a 5% cap rate can produce 8 to 12% cash-on-cash return if financed at a lower rate.
How It Is Calculated
How to Calculate Cap Rate
The Formula
Cap Rate = Net Operating Income (NOI) / Purchase Price x 100
Step 1: Calculate Annual Gross Income
Gross Income = Monthly Rent x 12 + Other Income
Step 2: Subtract Vacancy
Effective Gross Income (EGI) = Gross Income x (1 - Vacancy Rate)
Step 3: Calculate NOI
NOI = EGI - Operating Expenses
Operating expenses include:
- Property taxes
- Insurance
- Maintenance and repairs
- Property management fees
- Utilities (if landlord-paid)
- Condo/HOA fees
Do NOT include mortgage payments in NOI — cap rate measures the property's return regardless of financing.
Step 4: Calculate Cap Rate
Cap Rate = (NOI / Purchase Price) x 100
Example Calculation
Property: $500,000 duplex in Calgary
- Monthly rent (both units): $3,000
- Annual gross income: $36,000
- Vacancy (5%): -$1,800
- Effective gross income: $34,200
Operating Expenses:
- Property tax: $3,600
- Insurance: $1,200
- Maintenance: $3,000
- Property management (8%): $2,880
- Total expenses: $10,680
NOI = $34,200 - $10,680 = $23,520
Cap Rate = ($23,520 / $500,000) x 100 = 4.7%
Limitations of Cap Rate
- Doesn't account for financing (mortgage)
- Doesn't factor in future appreciation
- Doesn't consider tax implications
- Based on current income, not projected growth
Example
Example: Comparing Two Properties
Property A: Toronto Condo — $650,000
| Item | Amount |
|---|---|
| Monthly rent | $2,500 |
| Annual gross income | $30,000 |
| Vacancy (5%) | -$1,500 |
| EGI | $28,500 |
| Operating expenses | -$8,500 |
| **NOI** | **$20,000** |
| **Cap Rate** | **3.1%** |
Property B: Edmonton Duplex — $400,000
| Item | Amount |
|---|---|
| Monthly rent | $2,400 |
| Annual gross income | $28,800 |
| Vacancy (5%) | -$1,440 |
| EGI | $27,360 |
| Operating expenses | -$7,000 |
| **NOI** | **$20,360** |
| **Cap Rate** | **5.1%** |
Analysis
| Metric | Toronto Condo | Edmonton Duplex |
|---|---|---|
| Purchase price | $650,000 | $400,000 |
| Cap rate | 3.1% | 5.1% |
| Annual cash flow (pre-mortgage) | $20,000 | $20,360 |
| Cash needed (20% down) | $130,000 | $80,000 |
| Historical appreciation | 5 to 7%/year | 3 to 4%/year |
Key insight: The Edmonton property generates similar NOI at a much lower price, but the Toronto property has historically appreciated faster. Investors must weigh cash flow (cap rate) against appreciation potential when choosing markets.
Target cap rates by strategy:
- Cash flow investor: Target 6%+
- Balanced investor: Target 4 to 6%
- Appreciation investor: Accept 3 to 4% in growth markets
Related Calculator
Cap Rate Calculator
Capitalization rate
Sources & References
CMHC — Rental Market Statistics
CMHC rental market data for Canadian cities including rents and vacancy rates
Canadian Real Estate Association (CREA)
National and regional real estate market statistics and trends
Appraisal Institute of Canada
Professional standards for property valuation including income approach and cap rate methodology
Last reviewed: August 14, 2026
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