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Rental Property Calculator
To account for lumpy costs that become necessary intermittently, this calculator includes CapEx Reserves in the calculation of cash flow.
Special Rental Property Mortgage Rates
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Purchasing Investment Properties
Investing in real estate is one of the best ways to build wealth in Canada. Many factors positively influence your net worth, including tax benefits, leverage, cash flow and appreciation. The mortgage down payment required for your investment property depends on if you will be living in a unit.
If you live in one unit of a multiplex up to four units total, you may meet eligibility requirements for CMHC insurance. This allows you to pay a minimum of a 5%-7.5% down payment depending on the multiplex valuation. However, the purchase price can’t exceed $1 million.
If you will not be living inside your investment property, then you will usually need to make a minimum down payment of 20% to qualify for a commercial mortgage. However, you may be eligible to fund this down payment with the home equity of your primary residence. If your rental property will have more than five units, you may be able to qualify for CMHC’s new MLI Select program. This gives certain incentives, such as an amortization of up to 50 years and a max LTV of as high as 95%, if your property meets certain targets.
For example, you can refinance your mortgage or take out a home equity line of credit (HELOC) for up to 80% of your primary residence’s value. If your home value is $500,000 and you have a $100,000 mortgage remaining, then you can borrow up to an additional $300,000 to use as a down payment for an investment property mortgage.
If an investment property costs $500,000, you can borrow $100,000 from your principal residence equity as a down payment. However, you still have $200,000 remaining from the initial $300,000 you borrowed to invest in more properties.
Using the equity in your home to invest can be a way to grow your assets quickly, and you may even use the equity in your investment properties to further purchase additional properties. However, this type of leverage can be hazardous and relies on housing prices increasing over time. Canadian mortgage rates will also significantly impact your returns and cash flow.
Rental Income
Gross Rental Income is the equivalent of business revenue. It’s the total amount of money you will get from renting out your property before accounting for costs or expenses. It is calculated by multiplying the monthly rent by 12 (i.e. one year) and then factoring in the vacancy rate.
Rental Income Formula
The vacancy rate (%) is the portion of time your property is empty and not making money. Another way to think of a vacancy rate is when your property is making money, which is calculated as (100% - Vacancy Rate).
The Net Rental Income deducts the operating expenses of owning a rental property from your Gross Rental Income. These expenses include but are not limited to:
- Property Tax
- Insurance Expenses
- Maintenance Expenses
Your rental income can also be impacted by tenant-landlord disputes, which can largely be avoided by conducting a tenant background check before renting out a property. This will save you from going through the process of evicting a tenant.
In the calculator, we have also included financing costs such as loan or mortgage payments to show you the actual income you will receive from a rental property.
We build upon the prior rental income formula to get:
Renting out Properties
You can rent it out once you own an investment property to generate rental income. This may even include short-term rentals, such as Airbnb. There are two ways to look at rental property income:
- Cash flow approach: One approach is aiming for rental income to completely cover the costs of the property, such as the mortgage payments, insurance, property taxes, and maintenance. Investors using this approach will want to have a positive monthly cash flow. For example, a rental property might have a $2,000 monthly mortgage payment. The owner will then aim to rent the property for more than $2,000 a month while ensuring they will have enough to cover annual taxes, insurance, and leave room for profits.
- Appreciation approach: The second approach is to ignore the cash flows of an investment property, and instead look towards the home’s value. The intention is that most of the gains will be from increases in the house’s value, while rental income is a bonus. For example, an investor might project that the value of their $500,000 home will increase by 5% every year. That would equal a $25,000 gain in the first year, or just over $2,000 a month. If the mortgage costs $2,000 a month, the home’s value’s unrealized gain covers the mortgage payments. The amount of the rental income would then be supplemental income.
However, the appreciation approach is not always recommended. The investor will need to cover out-of-pocket shortfalls if their regular rental income doesn’t cover their expenses. For example, if their rental income is $1,500 a month and their mortgage payment is $2,000 a month, the investor will need to make up for the $500 a month shortfall every month. There’s no guarantee the property will appreciate either, which means that they would be renting at a loss.
Being a landlord also involves a certain level of work. You will need to find and manage tenants while also overseeing the property. You can use a property management company or hire a property manager, but that will cost money and eat into your income.
Can I rent out a room in my house?
You can rent out a room in your house if you are a homeowner. For example, you might have a spare room that you want to rent out. You will need to check if your local bylaws and building codes allow specific units to be rented out, such as a basement or in-law suite. You may also need to check your mortgage and insurance agreements to see any restrictions against renting out a portion of your home.
Capitalization Rate (Cap Rate)
The Capitalization Rate, or Cap Rate, is a fundamental metric used to evaluate a property’s potential rate of return based on its income-generating power, independent of financing. Think of it as the real estate equivalent of an "earnings yield" (the inverse of a stock's P/E ratio). It tells you what your annual percentage return would be if you bought the entire property in cash.
Below is the formula used to calculate the Cap Rate:
This calculator reports the acquisition cap rate (also known as the yield on cost), which measures the return against your total cost to acquire the property:
What is Net Operating Income (NOI)?
Net Operating Income is the property’s total annual income minus all operational expenses (such as property taxes, insurance, maintenance, and utilities). Crucially, NOI does not include mortgage payments or interest, as it measures the property's performance on its own merits, regardless of how much debt you choose to place on it.
Example:
Imagine a property generates $50,000 in annual rental income. The operational expenses (taxes, insurance, and maintenance) total $20,000 for the year.
Your NOI is $30,000 ($50,000 - $20,000).
If the price of the property is $700,000, your Cap Rate would be calculated as:
What is a "Good" Cap Rate?
Typically, market cap rates range between 4% and 12%, depending on the asset class and location.
A higher cap rate generally signifies a property that generates strong cash flow relative to its price. However, a high cap rate often reflects higher risk, such as an older building with deferred maintenance or a property located in an economically stagnant neighbourhood.
A lower cap rate means the property is more expensive relative to the income it generates. This is common in highly desirable housing markets (like the Toronto housing market or the Vancouver housing market), where investors accept lower immediate yields in exchange for lower risk and higher potential for long-term property appreciation.
For a deeper dive into this metric, visit our dedicated Cap Rate Calculator.
Cap Rate vs. Gross Rental Yield
Investors sometimes confuse Cap Rate with Gross Rental Yield. Gross Rental Yield is a simpler, quick-glance metric that divides your raw annual rental income by the purchase price, completely ignoring expenses:
While Gross Rental Yield is helpful for a quick baseline scan of a market, Cap Rate is a far more accurate measure of a property's true profitability because it accounts for the real-world costs of running the building.
Cash-on-Cash (CoC) Return
Cash-on-Cash (CoC) Return is a specific real estate metric used to measure the actual cash income earned on the cash you invest. While traditional ROI is typically used for investments with a definitive end date (like buying and selling a stock), Cash-on-Cash return helps investors understand the ongoing, liquid profitability of a rental property on a year-to-year basis.
Below is the formula used to calculate Cash-on-Cash Return:
Understanding Cash-on-Cash Return: An Example
The best way to understand this formula is with a practical example. Imagine purchasing a $500,000 investment property with a $100,000 down payment and $10,000 in upfront closing costs. Your total out-of-pocket cash investment is exactly $110,000.
Next, imagine renting this property for $3,200 per month, assuming a 100% occupancy rate. This generates a total gross rental income of $38,400 for the year.
To find your true cash-on-cash return, we must subtract all actual cash leaving your bank account during the year:
Operating Expenses: Imagine annual property taxes, insurance, and maintenance costs add up to $3,833 per year. Subtracting this from your gross rent gives you a Net Operating Income (NOI) of $34,567 ($38,400 - $3,833).
Financing Costs (Debt Service): For your $400,000 mortgage at a 4.5% interest rate, your total annual mortgage payments (combining both principal and interest) come out to $26,567 for the first year.
Subtracting your full mortgage payments from your NOI leaves you with an Annual Net Cash Flow of $8,000 ($34,567 - $26,567). This is the actual cash remaining in your bank account at the end of the year.
To calculate your Cash-on-Cash Return, divide this net cash flow by your initial out-of-pocket investment:
(Note: While the principal portion of your mortgage payment reduces your immediate cash flow, it simultaneously increases your net worth by building home equity. This means your Total Return is actually higher than your Cash-on-Cash Return alone!)
As the years pass and rents naturally rise with inflation, your annual net cash flow and your Cash-on-Cash Return may grow.
Cap Rate vs. Cash-on-Cash Return
Both Cap Rate and Cash-on-Cash Return are essential metrics for evaluating a property, but they look at it differently. Cap Rate evaluates a property's natural performance independently of debt, assuming you paid 100% cash. Cash-on-Cash Return, on the other hand, directly considers financing. It tells you exactly how much your leverage (the mortgage) is boosting or hurting your actual returns.
How to Find a Rental Investment Property
When searching for a rental property, look at areas that have a high number of jobs and where home prices are affordable. For example, you should not buy a house in downtown Toronto if it’s 10 times the price of a house in downtown Hamilton.
Once you have found an area of interest, make sure to prequalify for a mortgage before talking with qualified real estate agents in the city. These agents will guide you to up-and-coming neighbourhoods that are great for investment. Expect to analyze lots of deals and don't be afraid to pass up bad ones.
Compare the rental income, cap rate, and ROI of deals with our rental calculator. Also, ensure you have the required mortgage approval documents to expedite the process. When you have found a property you like, make a conditional offer. Don't be upset if your offer isn't accepted. In competitive housing markets, you have to make upwards of 10 offers to secure your investment property. After finalizing a deal, you may also want to improve the property. In this case, a home renovation loan could be right for you.
Passive vs Active Investing
A common misconception of rental property investing is that it's a low-maintenance method to build wealth. Any landlord knows this is not true. As mentioned above, you will need to manage tenants, while maintaining the property. Although you can hire a property management firm, they are generally expensive for small investors.
Investing in a REIT or a Rental Property
Investing in Canadian Real Estate Investment Trusts (REITs) is an inexpensive way to own a stake in multiple investment properties with the click of a button. With many different types of REITs available, you can diversify across residential, commercial, and industrial properties for as little as a few dollars.
While REITs lower the barriers to entry into real estate investing, they generally charge fees and tend to provide a lower return than owning a rental property directly. Although rental properties require more work, they offer the benefit of building home equity, which you can use to finance additional rental property acquisitions.
Investing in Stocks or a Rental Property
While stocks and rental property both generate returns through equity appreciation, there is a big difference between the two investments. Stock prices experience volatility which can result in significant losses.
Real estate prices move slowly but generally increase. This means you will generally not wake up to a 10% drop in your property valuation. Additionally, it is far riskier to buy stocks with leverage than real estate.
However, for those looking for increased returns and less volatility, a balanced portfolio of stocks and rental properties is a great option. With this strategy, you can invest in both the stock market and real estate for increased diversification and income generation.
Income Tax Consideration
The rental income you are producing should be reported on your tax return and will be taxed the same way as employment income. But you can claim all your expenses, including the depreciation of the building you are renting, as deductions to reduce your payable tax.
The Bottom Line
Overall, investing in rental property is a great way to grow your wealth. The major benefit of rental property investing is home equity which you can then use to purchase more investment properties.
If you are comfortable taking on the responsibility of managing tenants and repairing toilets, becoming a landlord is something to consider. You may just find it's what makes investing in real estate so rewarding.
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.