What Is a Good Cap Rate for a Rental Property?

If you're sizing up an income property, one number cuts through the noise: the capitalization rate, or "cap rate." It tells you the annual return a property would generate if you bought it outright in cash — a quick, apples-to-apples way to compare deals. This guide shows you the formula, walks through a worked example with clearly hypothetical numbers, and explains what counts as a "good" cap rate.

Key takeaways

• Cap rate = net operating income (NOI) ÷ property value, expressed as a percentage.
• NOI is annual income minus operating expenses — but excludes your mortgage payment.
• A higher cap rate usually means higher potential return but often higher risk; a lower cap rate signals a safer, pricier asset.
• There is no single 'good' number — it depends on location, property type, and your goals.
• Always pair cap rate with cash flow and a conservative, rising-rate stress test.

What a cap rate measures

The cap rate estimates the annual return a property would produce relative to its price, assuming you paid all cash. Because it strips out financing, two investors can use it to compare the same building even if one uses a mortgage and the other doesn't. It's the real-estate equivalent of a yield.

The formula

Cap rate = Net Operating Income (NOI) ÷ Property value. NOI is your annual rental income minus operating expenses — but it does not include your mortgage payment, because the cap rate is meant to be financing-neutral.

A worked example

Let's run the math on a clearly hypothetical property with round numbers. These figures are an example only — not a market quote or a prediction.

With an NOI of $24,000 on a property valued at $400,000 (example), the cap rate is $24,000 ÷ $400,000 = 6%. Note the mortgage was excluded — that belongs in your cash-flow analysis, not the cap rate.

So what's a 'good' cap rate?

There's no universal magic number, and beware anyone who quotes one. A "good" cap rate is relative to location, property type, and risk. Prime properties in expensive, stable areas tend to trade at lower cap rates because buyers accept a smaller yield for safety and growth potential. Higher cap rates often appear where rents are higher relative to price — frequently because there's more risk or less appreciation.

• Lower cap rate — pricier, often safer, more appreciation-driven.
• Higher cap rate — cheaper relative to income, often higher risk or lower growth.
• Context is everything — compare against similar properties in the same market.

What cap rate doesn't tell you

Cap rate is a snapshot, not the whole picture. It ignores your mortgage, so it says nothing about monthly cash flow. It assumes today's rents and expenses hold. And it doesn't account for appreciation, vacancies beyond your estimate, or major repairs.

Pair it with cash flow and a stress test

After the cap rate, check your actual cash flow with financing, then model the deal at a rate 2% higher than today's. For the bigger framework, see how to invest in real estate in Canada.

Using cap rate in your search

Use cap rate to shortlist, not to decide. Calculate it consistently across candidates, then dig deeper on the ones that clear your bar. Watch where the market sits in its cycle (see real estate market cycles and the Ontario housing market outlook), and weigh pre-construction against resale in pre-construction vs resale.

Buy income property with cashback

Eligible HOMEH buyers receive the industry's highest Cashback Rebate — which directly improves the cash you have working in a deal. Browse income listings or estimate your rebate with the cashback calculator.