How to Calculate Cap Rate on Rental Properties

Cap rate is the single most talked-about metric in real estate investing. Every landlord podcast mentions it. Every property listing uses it. But most landlords calculate it wrong - or don't know what the number actually tells them.

Let's fix that.

The Cap Rate Formula

Cap Rate = Net Operating Income (NOI) / Purchase Price x 100

That's it. Two numbers. But getting the NOI right is where most people stumble.

Step-by-Step Calculation

Step 1: Calculate Gross Income

Add up ALL income from the property:

• Monthly rent: $1,800/month = $21,600/year
• Parking: $75/month = $900/year
• Laundry: $50/month = $600/year
• Total Gross Income: $23,100/year

Step 2: Calculate Operating Expenses

Add up all expenses EXCEPT mortgage (mortgage is financing, not operations):

• Property taxes: $3,200/year
• Insurance: $1,500/year
• Maintenance: $2,000/year
• Vacancy allowance (5%): $1,155/year
• Total Expenses: $7,855/year

Step 3: Calculate NOI

$23,100 - $7,855 = $15,245 NOI

Step 4: Divide by Purchase Price

Purchase price: $320,000 CAD (~$235,000 USD)

Cap Rate: $15,245 / $320,000 = 4.76%

What's a Good Cap Rate?

It depends on your market:

• 3-5%: Major Canadian cities (Toronto, Vancouver, Montreal)
• 5-7%: Mid-size Canadian/US cities, suburbs
• 7-10%: Smaller US markets, cash flow plays
• 10%+: High-risk areas or value-add opportunities

A 4.76% cap rate in Montreal is solid. The same cap rate in a small US city might indicate overpaying.

Cap Rate Limitations

Cap rate ignores two critical things:

1. Financing: It doesn't account for your mortgage. A high cap rate property with a bad mortgage rate might still lose money monthly.
2. Your cash invested: It uses the full purchase price, not your down payment. Cash-on-cash return is better for measuring YOUR actual return.

Skip the Manual Math

Mozongi REMA calculates cap rate automatically for every property. Enter your purchase price and income sources - the dashboard shows your cap rate in real time, alongside NOI, cash-on-cash return, and 10+ other metrics.