Cap rate (net operating income ÷ purchase price) is the quickest way to compare commercial investment opportunities — but only if you're reading it correctly.
Calculate Net Operating Income accurately
Gross rental income, minus a realistic vacancy allowance, minus actual operating expenses (taxes, insurance, maintenance, management) — but NOT debt service. A cap rate is calculated before financing, not after.
Divide NOI by purchase price
Cap rate = Net Operating Income ÷ Purchase Price, expressed as a percentage. A $50,000 NOI on a $700,000 purchase price is roughly a 7.1% cap rate.
Compare against the going rate for that property type and area
Cap rates vary meaningfully by property type, location, and building class — a downtown office building and a suburban industrial property don't trade at the same range, even in the same city.
Weigh the cap rate against growth potential and risk
A higher cap rate often reflects real risk (deferred maintenance, weaker tenant, secondary location) rather than a genuine bargain — read the number in context, not in isolation.
Confirm the NOI you're given excludes debt service and includes a realistic vacancy allowance, not just a best-case scenario.
Ottawa's typical cap rates run roughly 6–10%, but vary meaningfully by property class, tenant quality, and location within that range.
Cap rates tend to move opposite bond yields over time — rising rates generally put upward pressure on cap rates (and downward pressure on prices), and vice versa.
Cap rate is an unlevered metric (ignores financing); cash-on-cash return accounts for your actual mortgage payment. They can tell very different stories about the same property.
A property trading at a higher cap rate because of below-market rents or deferred maintenance can be a genuine opportunity — but only if you've actually priced in the cost and risk to fix it.
Book a free consultation with Narges to talk through the numbers on a specific property, or ask HAI to walk through a cap rate calculation.
