Sandeep Pawar
Broker
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Rental property numbers: yield, cap rate and cash flow
The six numbers every investor should run before an offer, with the formulas, one worked hypothetical example and a calculator that stress-tests your deal.
The short answer: start with net operating income (rent after vacancy, minus operating costs, before the mortgage). Divide it by the price for the cap rate. Subtract the mortgage payments for cash flow. Divide cash flow by the cash you put in for cash-on-cash return. Then stress-test it: if the deal only works at today’s rate with no vacancy, it is a bet, not an investment.
The six numbers and their formulas
Each number answers a different question. Use all six together; any one of them alone can make a weak property look good.
| Number | Formula | The question it answers |
|---|---|---|
| Gross yield | Yearly rent ÷ price | A quick first filter. Ignores every cost. |
| Net operating income (NOI) | Yearly rent − vacancy − operating costs | What the property earns before any mortgage. |
| Cap rate | NOI ÷ price | How the property performs on its own, regardless of how you finance it. |
| Cash flow | NOI − yearly mortgage payments | Does the property pay for itself each month, or do you top it up? |
| Cash-on-cash return | Yearly cash flow ÷ cash invested | What your own money earns in cash, before tax. |
| Total return (ROI) | (Cash flow + principal repaid + change in value) ÷ cash invested | The full picture, including the parts that are only on paper until you sell. |
Operating costs include property tax, insurance, maintenance, condo fees, utilities you pay, property management, licensing and advertising. They do not include mortgage principal or interest. Cash invested includes the down payment, land transfer tax, legal fees and any repairs you pay for up front.
Lenders and careful investors watch two more ratios. The debt service coverage ratio is NOI ÷ yearly mortgage payments; below 1.0, the rent does not cover the mortgage and costs. The break-even rent is the rent that makes cash flow zero.
A worked example
Hypothetical example
A legal two-unit house in Brampton: a main unit and a registered basement unit. Every figure below is an assumption chosen for illustration, not a quote, a current rate or a market rent for any real property.
| Purchase price | $900,000 |
| Down payment (20%, so no mortgage insurance) | $180,000 |
| Mortgage | $720,000 |
| Interest rate and term (assumed) | 4.5% fixed, 5 years |
| Amortization | 25 years |
| Rent: main unit $2,900 + basement $1,900 | $4,800 a month |
| Vacancy allowance | 3% of rent |
| Property tax | $6,500 a year |
| Insurance (landlord policy) | $2,400 a year |
| Maintenance reserve | 5% of rent |
| Property management | $0 (self-managed) |
| Utilities paid by the owner | $250 a month |
| Ontario land transfer tax (no first-time refund) | $14,475 |
| Legal, title insurance, inspection and appraisal | $3,000 |
| Line | Amount |
|---|---|
| Gross rent ($4,800 × 12) | $57,600 |
| Less vacancy (3%) | −$1,728 |
| Less operating costs ($6,500 + $2,400 + $2,880 + $3,000) | −$14,780 |
| Net operating income | $41,092 |
| Less mortgage payments ($3,985 × 12) | −$47,820 |
| Cash flow | −$6,728 (−$561 a month) |
| Cash invested ($180,000 + $14,475 + $3,000) | $197,475 |
| Gross yield ($57,600 ÷ $900,000) | 6.4% |
| Cap rate ($41,092 ÷ $900,000) | 4.57% |
| Cash-on-cash return (−$6,728 ÷ $197,475) | −3.4% |
| Principal repaid in year one | $16,045 |
| Return before any price change (−$6,728 + $16,045) ÷ $197,475 | 4.7% |
| Return if the value rose 2% in the year (adds $18,000, unrealized) | 13.8% |
| Debt service coverage ($41,092 ÷ $47,820) | 0.86 |
| Break-even rent | about $5,409 a month |
What this tells you: the property does not pay for itself at 20% down. The owner tops it up by about $561 a month while the tenants repay about $16,000 of principal in year one. The 13.8% figure depends entirely on a price rise that has not happened and is not cash until the property is sold.
Now put 35% down ($315,000) on the same assumptions. The mortgage payment falls to about $3,238 a month, and cash flow turns slightly positive at about $187 a month. But your cash invested rises to $332,475, so cash-on-cash return is only about 0.7%. More cash in makes the property safer, not more profitable.
Calculation notes: Canadian fixed-rate mortgages compound semi-annually, which this example and the calculator use. Land transfer tax uses Ontario’s rates from Ontario.ca. Hypothetical example only. Your rent, costs, rate and lender terms will differ.
Rental cash-flow calculator
The calculator opens with the example above. Change any input to match a property you are considering. Tick the stress test to see the same property with a rate 2 points higher, rent 10% lower and one month empty each year.
How to read the results
- Cap rate below your mortgage rate: borrowing costs more than the property earns. Cash flow will be thin or negative unless you put more money down.
- Debt service coverage below 1.0: rent does not cover the mortgage and costs. You need a plan, and the cash, to fund the gap every month.
- Break-even rent above market rent: the property depends on rents rising or rates falling. Check real rents for similar units, not the seller’s estimate.
- Positive cash flow that disappears under stress: you have little margin for a vacancy, a repair or a renewal at a higher rate. Hold a larger reserve.
- Return that depends on appreciation: appreciation has been real over long periods, but it is never certain. It is not cash until you sell. How real estate builds wealth explains the difference.
Want me to run these numbers on a real listing, with real rents?
Book an investment strategy callMistakes that make a deal look better than it is
- Using the seller’s rent estimate, or rent from an unregistered unit you may not be able to keep renting.
- Leaving out vacancy, maintenance or management because you plan to do everything yourself.
- Counting principal repayment as cash flow.
- Using a teaser rate, or forgetting that a five-year fixed rate renews at whatever rates are in five years.
- Forgetting land transfer tax and closing costs in cash invested, which overstates every return.
- Ignoring income tax. Profit is taxable each year, and selling can trigger capital gains tax and recapture of depreciation you claimed. See rental income tax.
- Assuming rent can rise freely. Most units first occupied on or before 15 November 2018 are limited to Ontario’s yearly guideline. See Ontario landlord rules.
Check before you make an offer
- Market rent for each unit, from recent leases of comparable units, not asking rents alone.
- Whether each rental unit is legal and registered with the municipality.
- Current leases, rent amounts, deposits held and the date of each tenant’s last increase.
- Last year’s property tax bill, utility bills and insurance quote for a rental.
- For condos: the condo fee, what it covers, the reserve fund and any rental restrictions in the status certificate.
- A written rate and amortization from a mortgage agent, and how the lender treats rental income.
- A cash reserve for at least a few months of costs, plus one major repair.
- The stress-tested result in the calculator above, and your own answer to “can I carry this if it happens?”
Next: stress-test your investment in more depth, or see three full hypothetical case studies.
Questions investors ask
What is a good cap rate for a rental property in the GTA?
There is no single good number. A cap rate is net operating income divided by price, so it moves with prices, rents and costs in each building and neighbourhood. Compare a property’s cap rate with similar properties nearby and with your own mortgage rate. If the cap rate is below your mortgage rate, every borrowed dollar costs more than the property earns before principal repayment.
What is the difference between cap rate and cash-on-cash return?
Cap rate ignores financing: it is net operating income divided by the price. Cash-on-cash return includes the mortgage: it is your yearly cash flow after mortgage payments divided by the cash you actually put in. Two buyers of the same property have the same cap rate but different cash-on-cash returns if their down payments differ.
Is principal repayment part of my return?
Yes, but it is not cash in your pocket. Each mortgage payment repays some principal, which raises your equity. You only turn that equity into cash when you sell or refinance. Count it separately from cash flow so you can see whether the property pays for itself.
Should I include vacancy if my unit is already rented?
Yes. Every tenancy ends eventually, and a turnover usually means some empty weeks plus cleaning, repairs and advertising. Budgeting a few percent of rent for vacancy every year is more honest than assuming 100% occupancy forever.
How much should I budget for maintenance?
It depends on the age and type of property. A newer condo may need little beyond what the condo fee covers. An older house needs a roof, furnace, windows and appliances over time. Many investors budget a percentage of rent and keep a separate reserve for large items. Ask a home inspector what is near the end of its life before you buy.
Can a property with negative cash flow still be a good investment?
It can, if you can afford the monthly top-up for years, including after a higher rate at renewal. The rest of your return then depends on principal repayment and on prices rising. Negative cash flow is a bet on the future, not a return you have earned. Decide that knowingly.
What is the break-even rent?
The monthly rent at which the property covers its mortgage and operating costs, after allowing for vacancy, so cash flow is zero. If the market rent for the unit is well below your break-even rent, the property will cost you money every month.
Does this calculator include income tax?
No. It shows cash flow before income tax. Rental profit is taxable, and mortgage interest (not principal) and most operating costs are deductible. See the rental income tax guide and ask an accountant how it applies to you.
Sources
- Ontario.ca: calculating land transfer tax
- City of Toronto: municipal land transfer tax rates (from 1 April 2026)
- OSFI Guideline B-20: residential mortgage underwriting (conventional mortgages at or below 80% loan-to-value)
- CMHC: purchase mortgage loan insurance (owner-occupied homes of 1 to 4 units)
- Canada Revenue Agency: Guide T4036, Rental Income
- Ontario.ca: rent increase guideline (updated 23 June 2026)
Run the numbers on a real property
Send me a listing. I will check the rents, the legal status of each unit and the costs, then show you the base case and the downside.