Rental cash flow and cap rate matrix
Short answer
A rental's true cap rate is its net operating income (rent after vacancy, management, maintenance and capital reserves, property tax and insurance) divided by the price. Cash-on-cash return is the cash flow left after mortgage payments, divided by the cash you invested.
Analyze a rental property
Cap rate
6.42%
NOI ÷ price
Cash-on-cash
6.13%
Cash flow ÷ cash in
Cash flow
$789/mo
$9,469 a year
DSCR
1.37×
Lenders want 1.1×+
Break-even occupancy
79.2%
Covers all costs
Gross rent multiplier
9.8×
Price ÷ gross income
Expense ratio
34.8%
Opex ÷ EGI
Year-1 total return
20.9%
Incl. paydown and growth
10-year IRR
15.41%
After selling costs
| Profit and loss | Monthly | Annual | % EGI |
|---|---|---|---|
| Gross potential rent and other income | $4,700 | $56,400 | 104.2% |
| Less vacancy | -$141 | -$1,692 | -3.1% |
| Less bad debt and credit loss | -$47 | -$564 | -1.0% |
| Effective gross income (EGI) | $4,512 | $54,144 | 100.0% |
| Property tax | -$325 | -$3,900 | -7.2% |
| Insurance | -$183 | -$2,200 | -4.1% |
| Utilities paid by owner | -$100 | -$1,200 | -2.2% |
| Strata or condo fees | -$0 | -$0 | 0.0% |
| Landscaping and snow removal | -$50 | -$600 | -1.1% |
| Legal and accounting | -$67 | -$800 | -1.5% |
| Other operating costs | -$33 | -$400 | -0.7% |
| Property management (8% of EGI) | -$361 | -$4,332 | -8.0% |
| Repairs and maintenance reserve (5% of EGI) | -$226 | -$2,707 | -5.0% |
| Capital reserve (5% of EGI) | -$226 | -$2,707 | -5.0% |
| Total operating expenses | -$1,570 | -$18,846 | -34.8% |
| Net operating income (NOI) | $2,942 | $35,298 | 65.2% |
| Mortgage payments (principal and interest) | -$2,152 | -$25,830 | -47.7% |
| Cash flow before tax | $789 | $9,469 | 17.5% |
Cap rate matrix: price vs rent
How the cap rate moves if you negotiate the price or rents come in higher or lower.
| Price \ rent | -10% | -5% | As entered | +5% | +10% |
|---|---|---|---|---|---|
| $495,000 | 6.23% | 6.68% | 7.13% | 7.58% | 8.03% |
| $522,500 | 5.91% | 6.33% | 6.76% | 7.18% | 7.61% |
| $550,000 | 5.61% | 6.01% | 6.42% | 6.82% | 7.23% |
| $577,500 | 5.34% | 5.73% | 6.11% | 6.50% | 6.88% |
| $605,000 | 5.10% | 5.47% | 5.83% | 6.20% | 6.57% |
Cash-on-cash matrix: down payment vs rate
More down lowers the mortgage but ties up more cash. Negative cells lose money each year.
| Down \ rate | 3.80% | 4.30% | 4.80% | 5.30% | 5.80% |
|---|---|---|---|---|---|
| 20% | 8.49% | 7.31% | 6.10% | 4.86% | 3.58% |
| 25% | 7.97% | 7.06% | 6.13% | 5.17% | 4.19% |
| 30% | 7.61% | 6.89% | 6.15% | 5.39% | 4.61% |
| 35% | 7.34% | 6.76% | 6.16% | 5.55% | 4.92% |
| 40% | 7.14% | 6.66% | 6.17% | 5.67% | 5.16% |
10-year projection
Rents grow 3%, expenses 2.5% and the value 3% a year. Selling after year 10 returns $369,189 after selling costs and the mortgage payout.
| Year | NOI | Cash flow | Mortgage balance | Property value | Equity |
|---|---|---|---|---|---|
| 1 | $35,298 | $9,469 | $406,138 | $566,500 | $160,362 |
| 2 | $36,403 | $10,573 | $399,467 | $583,495 | $184,028 |
| 3 | $37,541 | $11,712 | $392,471 | $601,000 | $208,528 |
| 4 | $38,715 | $12,886 | $385,136 | $619,030 | $233,893 |
| 5 | $39,926 | $14,096 | $377,445 | $637,601 | $260,156 |
| 6 | $41,174 | $15,344 | $369,380 | $656,729 | $287,349 |
| 7 | $42,460 | $16,631 | $360,923 | $676,431 | $315,507 |
| 8 | $43,787 | $17,957 | $352,056 | $696,724 | $344,668 |
| 9 | $45,155 | $19,325 | $342,758 | $717,625 | $374,868 |
| 10 | $46,565 | $20,735 | $333,008 | $739,154 | $406,146 |
Does a $550,000 duplex cash flow?
Two units at $2,300 a month with $100 of other income bring in $54,144 a year after vacancy. Operating costs and reserves of $18,846 leave NOI of $35,298, a 6.42% cap rate.
With 25% down at 4.8%, mortgage payments are $25,830 a year, so cash flow is $9,469 (6.13% cash-on-cash). Over 10 years, with 3% rent growth and appreciation, the IRR is 15.41%.
How do I calculate a rental property's cap rate and cash-on-cash return?
- 1
Start with gross potential income
Multiply each unit's rent by 12 and add parking, laundry and other income.
- 2
Subtract vacancy and credit loss
What is left is effective gross income (EGI): what you actually expect to collect.
- 3
Subtract every operating cost
Property tax, insurance, utilities, management, and reserves for maintenance and big replacements. The result is net operating income (NOI).
- 4
Find the cap rate
Divide NOI by the purchase price. It measures the property's return before financing.
- 5
Find cash-on-cash
Subtract mortgage payments from NOI to get cash flow, then divide by the cash you put in.
Frequently asked questions
What is a good cap rate in Canada?
It depends on the city and building. Large-city residential rentals often trade at 3% to 5%, and smaller markets higher. A higher cap rate means more income for the price, usually with more risk.
What is the difference between cap rate and cash-on-cash return?
Cap rate ignores financing: NOI divided by price. Cash-on-cash includes the mortgage: cash flow divided by the cash you invested. In the example the cap rate is 6.42% and cash-on-cash is 6.13%.
How much should I budget for maintenance on a rental?
A common rule is 5% of rent for repairs plus 5% for capital reserves such as roofs, furnaces and appliances. Older buildings need more.
Where do these numbers come from?
All figures are your assumptions. Mortgages use semi-annual compounding. Income tax, CCA and capital gains tax are not included.