A Cap Rate is used to assess a property’s potential return on investment and compare it to other investment opportunities. A higher Cap rate implies a higher potential return on investment. Lower Cap Rate suggests a lower return on investment but may also imply a lower risk of investment as a lot of times you will find lower cap rate properties in extremely desirable neighbourhoods. Bigger cities often have lower cap rates. In Toronto Cap Rates Range from 3-5% for solid investment properties. Whereas smaller cities range from 5-9%. These days it is very hard to find anything over 7. 

The Cap rate is the most useful tool to compare the relative value of similar real estate.

The Cap rate tells you the percentage of profit you might get in a year for the property if you paid cash. It shows the properties natural ability to make money. 

It's a way to understand the property's basic profit potential on its own, without considering loans or financing.

Would you want to have your savings in an account making 4% or in a property making 6-7% that also has the ability to appreciate in value over time. Obviously, the property. 

Once you have the Cap rate you can also figure out how long it will take you to pay off the property. Again, this doesn't take into consideration loans which the rents will cover. For example with a 7% cap rate, you can use the following formula:

Years to Recover Investment = 100% (Initial Investment) / Cap Rate
In this case, for a property with a 7% cap rate:
Years to Pay Off = 100% / 7%
Years to Pay Off ≈ 14.29 years

So, it would take approximately 14.29 years to pay off a property with a 7% cap rate, assuming the property maintains a consistent cap rate and generates income at the same rate. Keep in mind that this calculation doesn't consider factors like property appreciation, or your mortgage, which can impact your actual return on investment over time. 

Ok so to calculate the Cap Rate you need to know the NOI - Net Operating Income and the purchase price. 

The Net Operating Income is all the Rents for the year plus additional income like parking or laundry, Minus the expenses. 

I will show you how to calculate the Cap Rate using two of my listings. (click link to view each of them)

A)291 Helen St – Triplex for $749,9000 – 7.1% Cap

B)984 Waterbury- $549,999 Semi with basement apartment. 7.6% Cap (Can finance this as Single Family)

Example A)291 Helen St. $749,900

The Net Operating Income is calculated as follows. 

Total Monthly Rent =$4950

The tenants all pay their own hydro.

 It also has coin laundry which brings in an additional $70-100 per month.

Total Rent+Laundry= $5035 Per Month (using 85 average for laundry. )

                                Multiply by 12 months = $60,420 per year. This is your operating Income. 

Next find out your expenses. 

Utilities for the common area- $1560

Insurance                               - $1900

Taxes                                     -$5330

Total Expenses= $8790

Net Operating Income = $51,630 ($60,420-$8790)

Now that we have the NOI we can calculate the Cap Rate. 

NOI/Purchase price = Cap Rate.

So lets say you purchase Helen St for $725,000. 

Your Cap Rate would be 7.1% ($51,630 / $725,000)

Example B- My Listing at 984 Waterbury- Semi for $549,999-Perfect for House Hacking.

Monthly Rent - $4200 Therefore $50,400 for the year.

With this property the rents are inclusive. So the landlord pays the expenses.

Here are his expenses. (bills are averaged for the year based on last month)

Taxes- $3439

Insurance-$1776

Gas- $780

Electricity-$1392

Water- $960

Yearly Expense Total = $8347

Net Operating Income=   $42,053    ($50,400-$8347)

Cap Rate = 7.6%

Both these are great cap rates for this market.

If you do this calculation on other properties that are for sale in Kingston most of them are in the 4-6% range. 

For example a little duplex was just listed today on 22 concession for $474,900. 

The NOI is $29,115

This would make this property a 6.1 Cap. 

For this property to be a 7.1 Cap like Helen the purchase price would have to be $410,070 

You get that number by working backwards. $29,115 / by 7.1% = $410,070

This is a good way to figure out how much you are willing to offer on a house. 

I hope you found this useful.

Please feel free to share it with anyone that is interested in learning about investment properties or that may be interested in one of these rental properties. 

If you have an investment property to sell or are interested in purchasing one let me know. I would love to help you!

Have a great day!