Cap Rate Explained: The #1 Metric Every Toronto Real Estate Investor Needs to Know

If you’re new to real estate investing, you’ve probably come across the term “cap rate.” Don’t let it scare you off—it’s actually one of the simplest tools to help you figure out whether a rental property is worth buying.

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 (short for capitalization rate) helps you figure out how much rental income you’re making on a property compared to what it’s worth. It’s a quick way to compare different properties and spot which ones might give you a better return.

How is Cap Rate Calculated?

Cap Rate = Net Operating Income (NOI) ÷ Property Value

NOI is your rent minus expenses like:

  • Property taxes
  • Utilities
  • Insurance
  • Condo fees (if any)
  • Maintenance
  • Vacancy allowance

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!

In this guide, we’ll break down everything you need to know about making a multiplex in a Toronto investment property.

Cap Rate Isn’t Everything—Other Things To Watch For

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.

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