What Is the Cap Rate in Real Estate?
The cap rate (capitalization rate) — TGA (taux global d'actualisation) in French — is the fundamental indicator for evaluating the profitability and market value of an income property. It measures the relationship between a property's net operating income (NOI) and its market value.
Cap Rate ↔ GRM Relationship: The cap rate uses the NOI (net income after expenses), while the GRM (gross rent multiplier) uses only gross income. They are complementary but not interchangeable. The cap rate is more precise; the GRM is quicker to calculate. Use both to cross-check your analysis.
4 Types of Cap Rate Every Investor Must Master
In practice, there are several cap rate variants, each with a specific purpose:
| Type | Purpose | Used by |
|---|---|---|
| Disposition cap rate | Based on the negotiated sale price | Buyers, sellers |
| Parity cap rate | Gives value equal to asking price | Negotiation |
| Economic value cap rate | Based on market rents (not actual rents) | Appraisers |
| Financing cap rate | Rate required by the lender | Banks / CMHC |
How to Calculate the Cap Rate in 5 Steps
Calculate potential gross income
Add all annual rents (including parking, laundry, storage), assuming 100% occupancy.
Deduct the vacancy and credit loss rate
Apply a realistic rate (generally 3–5%) to account for turnover, unpaid rent or units between tenancies.
Calculate operating expenses
Include: municipal taxes, school taxes, insurance, management, maintenance, snow removal, landscaping. Exclude: mortgage, income taxes, depreciation.
Calculate the NOI
NOI = Effective gross income − Total operating expenses. This is the net income available before financing.
Divide by the sale price
Cap Rate = NOI ÷ Sale Price × 100. A $1,200,000 property generating $66,000 NOI has a cap rate of 5.5%.
Concrete Example: 12-plex in Saint-Jérôme
12-unit building — sale price $1,380,000
- Potential gross income$96,000
- Vacancy (4%)− $3,840
- Effective gross income$92,160
- Municipal taxes− $14,500
- Insurance− $4,200
- Management (8%)− $7,373
- Maintenance & other− $6,000
- Total expenses− $32,073
- NOI$60,087
- Cap Rate4.35%
Cap Rates by Region — Quebec 2026
Market cap rates vary significantly by region. Here are the observed benchmarks in the Quebec market:
Cap Rate vs GRM vs NOI: Comparison Table
| Indicator | Formula | Pros | Cons |
|---|---|---|---|
| Cap Rate | NOI ÷ Price × 100 | Precise, accounts for expenses | Requires knowing real expenses |
| GRM | Price ÷ Gross income | Quick, no expenses needed | Ignores management quality |
| NOI | Revenues − Expenses | Real cash basis | Varies by management |
| Cap Rate (bank) | NOI ÷ Bank value | Determines financing | Can differ from sale cap rate |
Cap Rate as a Value Creation Lever
12-plex Example: Effect of Improving NOI
Cap Rate and Bank Financing
Banks use their own cap rate — the financing cap rate — to determine the maximum loan amount they will grant. This rate often differs from the negotiated sale cap rate, sometimes creating a significant gap in financed amount.
18-plex: Difference between sale cap rate and bank cap rate
- Sale price$2,800,000
- NOI (verified)$117,600
- Disposition cap rate4.2%
- Bank cap rate (own criteria)5.5%
- Value at bank cap rate$2,138,182
- Financing gap (at 75% LTV)− $648,614
This gap between the two cap rates means the buyer must bring more cash than a simple 25% calculation would suggest. Always verify the financing cap rate before making an offer.
7 Critical Cap Rate Errors
Error 1 — Gross income instead of NOI
Using gross rents without deducting expenses overestimates the cap rate and leads to overpaying.
Error 2 — Forgetting the vacancy rate
A building always has some vacancy. A 0% vacancy rate in the calculation is unrealistic.
Error 3 — Understating expenses
A seller often minimizes declared expenses. Normalize: taxes, insurance, management at market rates.
Error 4 — Including the mortgage
The mortgage is excluded from the NOI calculation. Including it mixes two different concepts.
Error 5 — Comparing different types of cap rates
Comparing a disposition cap rate with a bank cap rate leads to confusion. Be clear on which type you are using.
Error 6 — Ignoring deferred maintenance
A roof or heating system that needs replacing reduces the real NOI. Account for a capital reserve.
Error 7 — Comparing different markets
A 5% cap rate in Montreal is not equivalent to a 5% cap rate in a small regional city. Context matters.
Related Tools
13 Frequently Asked Questions about Cap Rates
The cap rate (capitalization rate) is the ratio between a property's net operating income (NOI) and its market value, expressed as a percentage. It is the fundamental indicator for evaluating the profitability and market value of a multi-residential property.
In the Quebec market in 2026, a cap rate between 5% and 6.5% is generally considered good for properties on the North Shore. On the Island of Montreal, cap rates often range from 3.5% to 5%, reflecting higher land values.
The cap rate is calculated from the NOI (net income after expenses). The GRM only uses gross income, without deducting expenses. They are complementary: the GRM is quick to calculate, the cap rate is more precise.
The NOI = Potential gross income − Vacancy rate − Operating expenses (taxes, insurance, management, maintenance). Financing (mortgage) is excluded from the calculation.
The disposition cap rate is based on the sale price negotiated between buyer and seller. The bank cap rate is calculated by the lender on its own criteria to determine maximum financing. These two rates can differ by 1 to 2%, which can create a significant gap in the financed amount.
Property value = NOI ÷ Cap rate. If the cap rate drops (compressed), the value rises for the same income. If the cap rate rises (decompressed), the value falls. A 1% variation in cap rate can change value by 15% to 25% on a stabilized property.
The cap rate reflects the risk and anticipated appreciation. In Montreal or Laval (strong demand, high prices), investors accept a lower cap rate because they bet on appreciation. In regional markets, cap rates are higher to compensate for lower liquidity and growth.
You can estimate it, but with less precision. Use our NOI calculator to first determine net income from revenues and expenses, then calculate the cap rate. A rough shortcut: GRM × estimated expense ratio, but this method is less reliable.
The parity cap rate is the cap rate that gives a property a value exactly equal to its asking price. If the market cap rate is higher than the parity cap rate, the property may be overvalued. It is a negotiating reference tool.
Yes. If comparable properties in the area sell at a 5.5% cap rate and the target property only yields 4.5%, you can argue that the price must come down to reach market parity. The value calculator above does this calculation automatically.
Municipal taxes, school taxes, building insurance, property management fees, maintenance and repairs, janitor (if applicable), snow removal, landscaping. Excluded: mortgage, income taxes, depreciation.
Not necessarily. A very high cap rate (8%+) can reflect elevated risk: difficult market, deferred maintenance, non-market rents, etc. A moderate cap rate in a quality location can be more profitable in the long run due to appreciation.
Yes. ImmoMulti analyzes the disposition cap rate, the bank cap rate and the parity cap rate to make a fair and documented offer. We explain our methodology to sellers so the offer is fully transparent.
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