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The cap rate (capitalization rate) measures a rental or commercial property's annual net operating income (NOI) as a percentage of its purchase price or market value, letting investors compare income properties independent of how each one is financed.
Cap rate is calculated as net operating income divided by the property's value — it deliberately ignores the mortgage payment, so two identical buildings with different financing still show the same cap rate. That makes it useful for comparing properties across different markets or ownership structures on a like-for-like basis.
It's a different tool from the ratios brokers use to qualify a borrower's personal income, such as GDS and TDS, and from the debt service coverage ratio lenders use once financing is factored in. Cap rate answers “how much does this property earn relative to its price,” while DSCR answers “does that income cover this specific loan's payments.”
Cap rate = Net operating income ÷ Property value
Ignores financing entirely: cap rate is calculated before any mortgage payment, unlike the debt service coverage ratio, which specifically tests whether income covers the loan payment.
Varies widely by market and property type: cap rates differ across Canadian markets and asset classes, with major commercial brokerages such as CBRE publishing quarterly Canadian cap-rate surveys by city and property type.
Used alongside DSCR in multi-unit underwriting: lenders financing rental and multi-unit properties, including through MLI Select, look at both the property's NOI-based metrics and its ability to service the specific loan being requested.
A risk signal, not just a return signal: a materially higher cap rate than comparable properties can reflect added risk or lower liquidity in that market, not just a better deal.
An investor is evaluating a small apartment building:
$60,000 ÷ $1,000,000 = 0.06, or 6%.
Definitions reflect Canadian federal and provincial rules as of the “Updated” date above. Not advice for any specific file.
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