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!
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.
Need Help Figuring Out What’s Right For You?
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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!
Reena S.April 23, 2025.I had a 30-minute consultation call with Samantha, and I’m so glad I reached out. We’re looking to purchase a property in Toronto with the goal of generating income and long-term appreciation, and Samantha really understood the financial and strategic sides of that equation. She’s incredibly honest, knowledgeable, and clearly experienced when it comes to working with investors. I walked away with valuable insights that will definitely shape our next steps. Highly recommend!L F-HApril 21, 2025.Phil helped me with both a sale and a purchase and he was great with both! I was particularly impressed with his knowledge of the market, his good rapport with other agents (as well as potential buyers/sellers), and with his friendliness and accessibility to me during the whole process.Carlos GoulartApril 21, 2025.Dave was really helpful. He took his time to show me the property wich now my family and I call home. Really attentive during the showing and also with all the requests for be able to rent the unit. Will recommend Dave anytime!! 👌Effie BruntonApril 21, 2025.Working with Laryssa from Elevate was an incredible experience from start to finish. As first-time investment property buyers, we had a lot of questions—and Laryssa was there every step of the way with answers, guidance, and genuine support. She really listened to our needs and respected our budget, while helping us stay focused on our goals. Laryssa’s knowledge of the area was spot-on, and because she’s also an investor herself, she gave us real, practical advice that made a huge difference. She helped us understand what to look for in a solid income property, walked us through renovation budgets, and shared so much of her own experience to make sure we were making smart decisions. One thing we especially appreciated was that she was always available to answer any questions we had—no matter how silly we thought they were. She never made us feel anything but supported and informed, which gave us a lot of confidence as we navigated this new process. We’re so grateful to have had her in our corner and can confidently say we wouldn’t have found this property without her. If you’re looking for someone who truly cares, is incredibly knowledgeable, and brings a personal touch to the process, Laryssa and the Elevate team are who you want by your side. Highly recommend!DGustavo SanzApril 16, 2025.I appreciate the pretty good attention and all the support that Karina and Kate offered to me. thank you so much.Shing LeungApril 7, 2025.Spiro from Elevate helped me purchase my first rental property and the experience has been seamless and highly educational. He and the rest of the Elevate team do a fantastic job of demystifying the whole process and making it accessible to new investors. As an agent, Spiro is very professional and generous--never hesitating in sharing his time, real estate know-how, and his valuable network of contacts. The fact that he and the whole Elevate team are investors add a ton of credibility to their offerings. In a space that's normally driven by sensationalism and hype, Spiro's measured and practical approach is a breath of fresh air.
