Is this rental property a good investment?

What is cap rate and how do you calculate it?

Capitalization rate — cap rate for short — is the single most important number in commercial and rental real estate. It expresses what a property would return in cash each year if you paid for it entirely in cash, with no mortgage at all. The formula is straightforward: take the property's net operating income (NOI) and divide by the purchase price. NOI is your gross annual rent, minus vacancy and credit losses, minus all the operating costs of running the building — property tax, insurance, maintenance, property management, utilities the landlord pays, condo fees if applicable. It does NOT include your mortgage payment, depreciation, or income tax.

The reason cap rate excludes financing is so investors can compare two properties on apples-to-apples grounds. A $400,000 duplex in Moncton with $36,000 of NOI has a 9% cap rate; a $1.2M Toronto rowhouse with $42,000 of NOI has a 3.5% cap rate. Those numbers tell you something real about how productively each building generates cash, independent of how each investor structured their loan.

What's a good cap rate in Canada in 2026?

It varies enormously by city. In Atlantic Canada — Halifax, Moncton, Saint John, Fredericton, Cape Breton — small multifamily and detached rentals still routinely show 6–9% cap rates. The Prairies (Calgary, Edmonton, Saskatoon, Winnipeg, Regina) typically land between 5–7%. Southwestern Ontario outside the GTA — London, Hamilton, Kitchener, Windsor — has compressed into the 4–6% range as out-of-town capital has flooded in. The GTA, Ottawa, Montreal, and Vancouver / Victoria are mostly 3–5% on residential, with downtown Toronto and Vancouver condos sometimes dipping below 3%. In those low-cap markets, investors are explicitly underwriting appreciation and rent growth, not current cash flow.

As a rough screening rule for 2026: above 6% is genuinely attractive in today's rate environment, 4–6% requires conviction on appreciation, and below 4% means the deal only works if rates fall meaningfully or rents rise faster than your underwriting assumes.

Cap rate vs cash-on-cash return: what's the difference and which matters more?

Cap rate measures the property. Cash-on-cash measures YOU. Cash-on-cash divides your annual pre-tax cash flow (after the mortgage) by the actual cash you put into the deal — down payment plus closing costs. Because most Canadian investors borrow 75–80% of the purchase price, cash-on-cash is usually higher than cap rate, sometimes much higher. That's the leverage effect: a 6% cap rate property financed with a 4.5% mortgage can produce a 12% cash-on-cash return.

Which one matters more depends on your goal. If you're comparing deals as deals — does this property work? — cap rate. If you're comparing where to put your $100,000 — should I buy this rental, invest in dividends, or pay down my own mortgage? — cash-on-cash. Most professional investors look at both, plus the internal rate of return (IRR) including principal paydown and projected appreciation.

The 1% rule and the 50% rule explained

The 1% rule says monthly rent should be at least 1% of the purchase price for a property to comfortably cash-flow. On a $400,000 building, that's $4,000/mo. The rule is American in origin and almost no Canadian market meets it anymore — a more realistic Canadian target today is 0.6–0.8%, with the gap made up by principal paydown, appreciation, and tax benefits. Treat the 1% rule as a quick screen, not a verdict.

The 50% rule is a back-of-envelope shortcut: over the long run, operating expenses (excluding mortgage) tend to consume about half of gross rent on a typical rental. So if your property grosses $24,000/year, expect roughly $12,000 in true operating costs — taxes, insurance, maintenance, vacancy, management, utilities, capex reserve — and use that for fast underwriting before you do a detailed pro-forma. Many new investors miss this and assume a 20% expense ratio; that's how they end up surprised.

Investment property mortgage rules in Canada

Three things every Canadian rental investor needs to know up front: First, the minimum down payment is 20% on a non-owner-occupied rental. CMHC does not insure pure rentals, so there is no path to 5% down on an investment property. If you live in one unit of a 2–4 unit building (owner-occupied multi-unit) you can put down as little as 5–10% depending on the configuration — that's why "house hacking" a duplex is such a popular entry point.

Second, amortization on uninsured investment property mortgages can go up to 30 years at most A-side lenders, which materially helps cash flow versus a 25-year amort. Some lenders cap rentals at 25 — your broker will know which ones don't. Third, rental income qualification matters as much as the rate. Lenders use one of two methods: the "rental add-back" counts 50% of gross rent as additional income for your debt ratios; the "rental offset" subtracts a haircut percentage of rent (often 20–50%) from the property's expenses to produce a net subject-property payment. Offset is usually more favourable for cash-flowing properties. You're also subject to the federal stress test — qualifying at the greater of your contract rate plus 2% or the benchmark — which can knock 15–20% off what you'd otherwise qualify for.

Common investor mistakes

Underestimating vacancy. Even in tight markets, plan on 5% vacancy minimum — units turn, tenants leave, repairs take time. Pro-formas that assume 0% vacancy are fiction.

Ignoring CapEx. The roof, furnace, hot water tank, windows, and exterior cladding all wear out on predictable schedules. A property with a 22-year-old roof and 18-year-old furnace is carrying $15,000+ of pending capex you need to reserve for. The 1% maintenance reserve in the calculator is a floor, not a ceiling.

Forgetting management fees. Even if you self-manage today, you may not always want to. Underwriting at 0% management ignores the cost of your own time and locks you into an active job, not an investment.

Only modeling year 1. Rents go up, expenses go up, mortgage principal pays down, and the property (hopefully) appreciates. A property that looks marginal in year 1 may be excellent in year 5. A property that cash-flows today on 1.99% pandemic rates falls apart when it renews at 5%. Always run a 5-year and 10-year view.

How a mortgage broker helps investors

When you walk into your bank for an investment property mortgage, you get that bank's single qualification policy applied to your file. Investors quickly run into ratio caps — typically 4–5 properties before the A-side won't lend you another dollar. A broker brings you portfolio lenders that specialize in investor files, B-lenders that take stretched-but-clean income, and credit unions with rental-offset methods that can stretch your qualifying power by hundreds of thousands. Rahul has helped multi-property investors structure refinances to free up cash for the next purchase, switch to rental-offset qualification when add-back stopped working, and bring B-lender solutions on commercial-grade small multi-unit when the A-side said no. If you're serious about building a rental portfolio in Canada, book a 15-minute call and bring your situation — you'll leave the call knowing exactly what's possible.