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Real Estate Capitalization Rate Calculator
What is Capitalization Rate
The capitalization rate, or cap rate, of a property is the amount of money you can expect to get from a property compared to its value or price per year. This includes all the expenses of operating the property, but does not include the costs of buying, selling, or financing the property. It is used to estimate the potential profitability of a property as well as compare it with other similar properties.
Capitalization Rate Formula
The net operating income (NOI) is the property’s annual income minus any expenses incurred. For example, if a property valued at 1 million is expected to receive rent income of $50,000 in a year with expenses totaling at $20,000, its net income would be $30,000 ($50,000 - $20,000) and the cap rate would be calculated as
Using the original purchase price gives the acquisition cap rate or yield on cost, which is different from the current (market-value) cap rate.
For current Canadian market benchmarks, investors can refer to quarterly Canadian cap-rate reports from CBRE and Colliers, which publish cap-rate ranges by property type and major Canadian market. Published Canadian cap-rate reports usually focus on commercial real estate and multi-residential apartment buildings. The national average all-properties cap rate edged lower by 2 bps quarter-over-quarter to 6.61% in Q1 2026, according to CBRE.
| Capitalization Rate by property type, reported by CBRE for Q1, 2026 | |||||||
|---|---|---|---|---|---|---|---|
| Property Type | Downtown Office | Suburban Office | Industrial | Retail | Multifamily | Seniors Housing | Hotel |
| Cap Rate | 6.7%–8.8% | 8.0%–9.0% | 5.7%–6.4% | 5.3%–6.7% | 4.5%–5.0% | 6.0%–8.2% | 7.6%–9.2% |
Note that cap rate for multi unit properties is often much higher than cap rate for single unit properties like a detached or a semidetached.
For single-family homes and condos, investors often use gross rental yield or price-to-rent ratios as rough benchmarks, then estimate a property-specific cap rate by subtracting operating expenses from rent to calculate NOI.
Cap rate vs. gross rental yield: Gross rental yield compares annual rental income with the property value before deducting expenses. Cap rate uses net operating income after operating expenses.
Cap rate vs. cash-on-cash return: Cash-on-cash return measures the investor's annual pre-tax cash flow relative to the cash they invested, so it includes financing effects. Cap rate does not include mortgage payments or financing.
Frequently Asked Questions
What kinds of income are included in the cap rate formula?
Operating income, or income you get from running the property, is included in the cap rate formula. Sources include:
- Rental income
- Parking structures
- Vending machines
- Laundry service
- Other amenities
What kinds of expenses are included in the cap rate formula?
Operational expenses and maintenance costs are included in the cap rate formula. Examples of expenses include:
- Building maintenance
- Property Management
- Property Tax
- Utilities
- Insurance
Capital expenditures that are long-term investments for the building do not count as operational or maintenance expenses and are not included in the cap rate formula. Instead, they affect the adjusted cost basis of the property. Mortgage principal and interest payments are not operating expenses and are not included in NOI. Cap rate measures the property before financing.
What does a higher or lower cap rate mean?
Cap rate measures a property’s current annual return compared to its current value. It is a similar metric to dividend yield when analyzing a real estate investment trust. A higher cap rate theoretically means a higher return but may come with more risk. For example, a property with risky tenants may have a high cap rate because of the possibility that the tenants will default and leave the property empty.
A lower cap rate usually means that there is less risk, but the potential return is expected to be lower. These are typically very stable properties in high demand areas.
Very roughly, the inverse of the cap rate can be interpreted as the number of years of NOI required to equal the property's current value, assuming NOI stays constant and ignoring financing, taxes, sale value, transaction costs, and capital expenditures. For example, a 5% cap rate implies that annual NOI equals 5% of the property's value, so it would take about 20 years of NOI to equal the property's value under those simplified assumptions. This does not account for risk, financing, rent growth, appreciation, or future expenses.
What are some factors that affect the cap rate?
The range of cap rates will differ across different property types, time periods, economic conditions, locations, and many other factors that play a role in determining the price or risk of a property.
What is a good cap rate?
A good cap rate depends on the property type, location, market conditions, and investor expectations. As a broad rule of thumb, cap rates often fall between 4% and 12%, but the most useful benchmark is the cap rate of similar properties in the same area.
If your property's cap rate is lower than that of comparable properties, it may be overvalued, have lower perceived risk, or offer stronger expected growth. If its cap rate is higher than comparable properties, it may be undervalued, have higher perceived risk, weaker expected growth, lower property quality, higher vacancy risk, or less stable income. In either case, a cap rate that is noticeably different from similar properties is a reason to investigate further rather than a clear sign that the property is good or bad.
Ultimately, a good cap rate for your investment depends on your strategy, financing costs, expected rent growth, appreciation potential, and risk tolerance. Many investors prefer a cap rate that is above their financing cost or required return, but a lower cap rate may still be acceptable if the property has lower risk, stronger expected rent growth, better appreciation potential, or other strategic benefits.
For example, if your mortgage rate is 5%, a property with a cap rate at or below 5% may produce weak or negative leveraged returns unless there are other benefits, such as strong expected rent growth, appreciation, tax advantages, or future refinancing opportunities.
Is mortgage included in the cap rate calculation?
No. Any expenses related to debt, including the rental property mortgage and interest payments, are not included because the calculation focuses on only the property and not the financing involved in obtaining it. This is the advantage of using cap rates as it does not distract you with debt and assumes using cash, which allows you to focus on the worth of the property without considering complications of accounting for different financing methods that people use.
Are taxes included in the cap rate calculation?
Property taxes are included in the cap rate calculation, but income taxes are not. This is because income tax rates will differ between owners and situations but property taxes will stay the same.
What is the difference between cap rate and yield?
The main difference between cap rate and yield is that cap rate is a valuation based on current income at current prices whereas yield is based on current income vs your initial investment. Cap rate can change from year to year depending on the valuation of the property while your yield will generally stay the same unless your income significantly changes.
There is an additional type of yield called a levered yield. A levered yield takes into account your costs in financing the property (e.g. mortgage interest costs) and compares the income from the property to your down payment or equity rather than the total cost of the property. This helps you understand how profitable a property is in a more practical context.
For example, let’s say that after financing costs your yield on a $1M property is only 1%, or $10,000. This might seem like a bad investment, but if you only had to put down a down payment of 5%, or $50,000, your levered yield would be 20% a year ($10K/$50K *100%).
The levered yield also helps you consider if a property is unprofitable. For example, a property can have a yield of 4% and seem profitable, but if you have to borrow at 5%, your levered yield would be negative and reflect the fact that you will be losing money on the property.
What is the difference between cap rate and ROI?
Return on Investment (ROI) measures the investor's return relative to the amount invested and may include financing costs, taxes, appreciation, and sale proceeds. Cap rate measures the property's NOI relative to its market value before financing.
Is the cap rate an accurate measure?
Cap rate is a quick and convenient calculation to measure how the market values a specific property relative to other similar properties in the area. However, it's only applicable to income-generating properties and can be misleading for properties whose valuations are driven by factors not associated with income potential such as single-family residential homes. The cap rate may not be useful to you if you are simply buying a home to live in without the intent to generate income for it or if you are only focusing on price appreciation potential.
- It is a way to quickly compare similar properties
- It is a commonly used measurement
- It can give you insight as to how the market views a certain property
- It can point out potentially undervalued or overvalued properties
Pros of using the cap rate:
- It does not take into account financing costs which can significantly impact the profitability of a property
- It does not take into account possible leverage used when buying a property and can understate a property’s profitability
- It will fluctuate based on the valuation of the property
- It is only useful for income-generating properties like rental homes and offices and not properties valued on other characteristics like potential price appreciation
Cons of using the cap rate:
How can I use cap rate?
Cap rate is best used as a way to measure the valuation of a property. It allows you to easily compare different properties of the same type without having to consider the complexities of financing. It can point out possibly undervalued or overvalued properties and tell you how the market views a certain property, especially in terms of its risk.
Cap rate is not the best way to measure the potential profitability of a property, however. The levered yield or ROI of a property would be better ways to check a good or bad investment. These take into account your financing costs and better reflect the financial return of a property compared to your investment or down payment.
Disclaimer:
- Any analysis or commentary reflects the opinions of WOWA.ca analysts and should not be considered financial advice. Please consult a licensed professional before making any decisions.
- The calculators and content on this page are for general information only. WOWA® does not guarantee the accuracy and is not responsible for any consequences of using the calculator.
- Financial institutions and brokerages may compensate us for connecting customers to them through payments for advertisements, clicks, and leads.
- Interest rates are sourced from financial institutions' websites or provided to us directly. Real estate data is sourced from the Canadian Real Estate Association (CREA) and regional boards' websites and documents.