If you’re looking to invest in Toronto real estate, understanding cap rate—short for capitalization rate—is absolutely critical. This single number is one of the most commonly used tools by investors, lenders, and appraisers to assess a property’s income potential and market value.
But in Toronto’s fast-evolving housing market, the cap rate does more than just tell you how much income a property produces—it directly influences your refinancing power, your ability to build wealth through renovations, and the stability of your cash flow in both the short and long term.
Whether you’re comparing turnkey rental properties, considering a fixer-upper with a conversion opportunity, or adding a laneway or garden suite, the cap rate is one of the first numbers you should be running.
In this guide, we’ll break down how to calculate it, why it matters in Toronto real estate specifically, and how it ties into strategies like value-add renovations, refinancing, and equity building.
This is for educational purposes only; it does not guarantee future performance or serve as financial or tax advice.
What Is Cap Rate?
The cap rate is a percentage that shows the return on investment based purely on the income a property generates, excluding mortgage financing.
How is Cap Rate Calculated?
Cap rate is calculated by taking the net operating income (NOI) of a property—which is your gross rental income minus all operating expenses—and dividing it by the current market value of the property.
Cap Rate = Net Operating Income (NOI) ÷ Current Market Value Of Property
NOI is your rent minus expenses like:
- Property taxes
- Utilities (if covered by the landlord)
- Insurance
- Condo fees (if any)
- Maintenance and repairs
- Vacancy allowance (for when the unit isn’t rented)
Key Things to Know About Cap Rates
- No Appreciation Factored In: Cap rate only looks at rental income. If you want a full picture, you also need to consider long-term appreciation.
- Mortgage Isn’t Included: Cap rate ignores mortgage payments, which affects your cash flow and risk.
- Use Market Value, Not What You Paid: Always base your cap rate on the property’s current value—not your purchase price.
- After-Reno Numbers Count: When renovating, don’t just add the cost of renos to the price. Use the real after-renovation market value to avoid fooling yourself with fake high cap rates.
So yes—cap rate is helpful, but it’s not the full story. It’s just one piece of your investment puzzle.
What Are Typical Cap Rates in Toronto Right Now?
Cap rates move with interest rates.
When borrowing gets more expensive, investors expect higher cap rates to make the numbers work. That shift can happen through:
- Price drops
- Rent increases
- Or both
Here’s a look at typical cap rates in Toronto (as of April 2025):
- Condos: 3%+
- Single-family homes: 4.5%
- Multiplexes: 5%
- Accessory units (e.g. laneway/garden suites): 8%+
What’s a “Good” Cap Rate?
We play it safe and aim for at least break-even cash flow—ideally a bit of cushion to cover emergencies or future repairs.
- When interest rates are low, you need a higher cap rate to break even.
- When interest rates are high, less of your mortgage goes to principal, so you can break even with a smaller spread.
As of April 2025, we’re aiming for at least a 5% cap rate for Toronto multiplex deals.
Cap rates and interest rates often move together. But right now, interest rates have dropped, and cap rates haven’t followed yet. That creates a sweet spot for investors. Add in the fact that we’re in a buyer’s market—and deals are even more attractive.
While some investors are still on the sidelines waiting, the truth is today’s cash flow is already way better than pre-pandemic. If you’re waiting for 8% annual appreciation again, don’t hold your breath. But prices are still down 15–20% from the peak and holding steady. That’s a good sign we’re near the bottom.
When the market moves again, it moves fast. Getting in now could mean stronger short-term upside and solid long-term gains.
A Real-Life Example in Toronto
Let’s say you buy a rental-ready multiplex in Toronto for $1.1 million. After expenses like property tax, insurance, and maintenance (but before mortgage payments), it brings in $55,000 a year. That gives you a 5% cap rate—a solid starting point.
Now imagine you buy a fixer-upper for $800K and put in $150K in renovations. If it ends up making the same $55K in rent, your total cost is $950K. That gives you a 5.8% cap rate—more income for every dollar you spent. You also just added value. At a 5% market cap, that reno property is now worth $1.1 million. That’s $150K in built-in equity.
But if you overpay—say, buy that fixer-upper for $950K and still put $150K into it—you’re all in at $1.1 million. Same result, no extra value. All that work, for nothing extra. Not a great move.
How To Make A Multiplex In Toronto: Your Complete Guide!
Why Cap Rate Matters for Toronto Real Estate Investors
In a market like Toronto, where property prices are high and rental demand is strong, understanding cap rate is crucial not just for comparing investments but for ensuring you’re buying a property that generates meaningful income.
A higher cap rate generally means the property is more profitable in terms of rental income relative to its value—which directly impacts your cash flow and your ability to hold the property long-term without bleeding money.
For Toronto investors focused on value-add strategies like conversions (turning a single-family home into a triplex or adding a garden suite), cap rate plays a huge role.
When you increase rental income through these strategies, you effectively raise the property’s value if you apply the market cap rate to your improved NOI. This makes cap rate directly tied to your refinance potential—a higher cap rate means you can refinance sooner and potentially pull out your invested capital faster.
Moreover, cap rate also influences your risk exposure. A higher cap rate property typically has a stronger cash flow buffer, making it easier to withstand economic shifts, rising interest rates, or rental vacancies. In contrast, low cap rate properties—common in Toronto condos—leave very little room for error or market fluctuations.
Cap Rate and Refinance Potential: How They Work Together
Cap rate doesn’t just help you evaluate property—it’s fundamental when it comes to boosting property value through renovations and refinancing. If you buy a property and successfully raise its NOI, the market cap rate can be applied to that new income stream to assess its new value. This is the core of the value-add strategy: increasing rent, controlling expenses, and then leveraging the improved valuation to refinance and recover your initial capital investment.
For example, if you buy a duplex in Toronto for $900K and through strategic renovations and tenant repositioning, you increase your NOI by $20,000, applying a 5% cap rate means you’ve just added $400,000 in value to that property. That’s capital you can potentially pull out when you refinance, allowing you to reinvest or de-risk your position—all while holding a better cash-flowing property.
This is why understanding cap rate is essential not just when buying, but when planning your entire investment strategy: cap rate drives refinance outcomes, equity growth, and long-term wealth building.
Beyond Cap Rate: Other Factors Toronto Investors Must Consider
Even though cap rate is useful, here’s what else you need to think about when investing in Toronto:
- Appreciation Counts Big in Toronto: Toronto’s long-term property value growth has outperformed many Canadian cities. So even if a cap rate looks low, strong appreciation can more than make up for it.
- Don’t Be Fooled By Condos: Yes, Toronto condos saw big price jumps in the mid-2010s, but they typically offer lower cap rates today. A balanced strategy with better income potential (like multiplexes) usually wins out.
- Location, Location, Location: More expensive neighbourhoods might have lower cap rates—but often come with more stable appreciation. If you want a safer investment, these areas can be worth it.
- Value-Add = Bigger Gains: Fixing up an older Toronto home? That’s smart. Renovations not only raise rents but also increase the property’s overall value. With so many aging homes in the city, the upside is real.
What Toronto Real Estate Investment Is Right For You?
Check out our complete Toronto real estate investment guide for all the details and real-life examples. If you’re ready to dive in, just book a call with us!
Need Help Figuring Out What’s Right For You?
If you’re serious about investing in Toronto real estate, learning to evaluate cap rate is your starting point—not just to compare properties, but to plan out how to increase returns, refinance, and build equity systematically. It’s one of the key levers smart investors use to control their outcomes rather than relying on market appreciation alone.
At Elevate Realty, we specialize in helping investors find, renovate, and manage high cap rate, high potential properties in Toronto. Whether you’re buying a turnkey multiplex or looking to create value through conversions and laneway housing, we can help you model out the numbers, cap rate included, so you know exactly what you’re getting into.
Want to see what’s possible for you? Book a strategy session with us!
