What is Cap Rate?
Cap Rate (Capitalization Rate) is the ratio between Net Operating Income (NOI) and the property's market value.
Formula: Cap Rate = NOI ÷ Purchase Price
How to Calculate NOI
NOI = Effective Gross Income - Operating Expenses. Expenses include taxes, insurance, maintenance, management — but NOT debt service.
Concrete Example
A fourplex at $800,000 generates $60,000/year in gross rents. With 5% vacancy and $24,000 in expenses:
- Effective income = $60,000 × 0.95 = $57,000
- NOI = $57,000 - $24,000 = $33,000
- Cap Rate = $33,000 ÷ $800,000 = 4.1%
What's a Good Cap Rate?
In Montreal in 2026, cap rates range from 4% to 6.5% depending on the area. Higher cap rate = better yield, but often more risk or less appreciation expected.