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Cap Rate vs. Cash-on-Cash Return: What’s the Difference?
A Simple Guide for Canadian Real Estate Investors
If you’re thinking about buying an investment property in Canada, you’ve probably heard the terms Cap Rate and Cash-on-Cash Return.
They sound similar, but they measure two different things. Understanding the difference helps you decide whether a rental property is truly a good investment — and it also helps you use our Investment Property Calculator more effectively.
In this guide, we’ll break both terms down in simple language, no math degree required.
What Is a Cap Rate?
Cap Rate (short for “capitalization rate”) measures how much income a property makes compared to the price you pay for it.
It helps you understand the property’s overall return, without looking at any mortgage costs.
Cap Rate Formula:
Net Operating Income (NOI) ÷ Purchase Price
What this tells you:
- Higher cap rate = higher potential return
- Lower cap rate = lower return (common in big cities)
Good for comparing:
- Different properties in the same city
- Different provinces (Ontario vs. Alberta vs. Nova Scotia, etc.)
- Rental buildings with and without mortgages
Cap rate is helpful because it's simple and doesn’t change based on how much you put down or what interest rate you get.
What Is Cash-on-Cash Return?
Cash-on-Cash Return measures how much money you earn based on the actual cash you invested (your down payment, closing costs, and any upfront expenses).
Cash-on-Cash Return Formula:
Annual Cash Flow ÷ Total Cash Invested
What this tells you:
- How hard your money is working
- Your real return after mortgage payments
- Whether the property is building income month after month
This number changes based on interest rates, loan amount, operating expenses, and rental income — so it’s more personal and more detailed than cap rate.
Key Difference Between Cap Rate and Cash-on-Cash Return
Cap Rate tells you if the property is strong.
Cash-on-Cash Return tells you if the deal is good for you.
Which One Should Canadian Investors Use?
Most smart investors look at both, because they answer different questions:
- Use Cap Rate to compare different properties quickly.
- Use Cash-on-Cash Return to understand your true profit after financing.
With interest rates, property taxes, and rental markets changing across Canada, these two numbers help you make smarter decisions no matter where you are — Toronto, Vancouver, Calgary, Halifax, Winnipeg, or anywhere in between.
Make It Easy: Use an Investment Property Calculator
Doing these calculations by hand can be frustrating.
That’s why we have free tools like the Investment Property ROI Calculator — they automatically calculate:
- Cap Rate
- Cash Flow
- Cash-on-Cash Return
- Operating Expenses
- Vacancy Allowance
- ROI
- And more
Just enter the numbers, and the calculator does the math for you.
Final Thoughts
Cap Rate and Cash-on-Cash Return are two simple but powerful tools for choosing the right investment property in Canada. Use them together to understand both the property’s performance and your personal return.