Cap Rate

Capitalization Rate. Annual net operating income (NOI, before debt service) divided by property value. A cap rate of 5% means the property generates 5% of its value annually in NOI.

Cap rate is useful for comparing buildings against each other regardless of how they're financed. It's useless for predicting your specific cash flow: cap rate ignores the mortgage entirely, and the mortgage is what determines whether the property puts cash in your pocket each month.

In Southern Georgian Bay, cap rates on residential rental property typically run 5 to 7%. Tighter urban markets like the GTA can be 3 to 4%. New-build garden suites under Bill 23 can hit 5 to 8% on the build cost, which is part of why they pencil so well. The Rental Cash Flow Calculator computes cap rate alongside cash-on-cash and DSCR.