A worked Toronto condo example using the 2026 residential tax rate of 0.767311% and CMHC rent data: how I calculate NOI, cap rate and cash-on-cash return.
This is for buyers and owners weighing a Toronto condo as a rental. The question I hear most: what does this unit actually earn?
Short answer: cap rate is net operating income divided by price, and cash-on-cash is your yearly cash flow divided by the cash you put in. In the financed example below, the cap rate is 2.23% and cash-on-cash return is negative.
Below I walk through each formula, then a full worked example using the City of Toronto's 2026 tax rate, CMHC's latest condo rent data and Ontario's land transfer tax brackets. The price, rent and expenses in the example are hypothetical. The rates are not.
What is a cap rate on a Toronto condo?
A cap rate (short for capitalization rate) measures annual operating income relative to purchase price, before financing. It excludes appreciation, income tax, closing costs and capital spending. I use it to compare properties, while keeping their risks and future costs in view.
The formula is simple: cap rate = net operating income ÷ purchase price. The hard part is getting net operating income right.
How do you calculate net operating income (NOI)?
Net operating income, or NOI, is the rent you actually collect minus the costs of running the unit. It comes before mortgage payments and before income tax. I build it in four steps:
- Gross potential rent: monthly rent times 12.
- Vacancy allowance: a deduction for months the unit sits empty between tenants.
- Operating expenses: condo fees, property tax, insurance, repairs, and leasing or management costs.
- NOI: collected rent minus operating expenses.
Two items do not belong in NOI: mortgage payments (they belong to the buyer's financing, not the property) and one-off capital items like a new kitchen. I track those separately.
Where the inputs come from
The city publishes the property tax rate. For 2026, Toronto's total residential tax rate is 0.767311%, combining the city rate, the provincial education rate and the City Building Fund levy. Council set it in the 2026 Tax Levy By-law, adopted February 10, 2026. Occupied condo units are taxed at this residential rate.
The tax applies to the assessed value set by the Municipal Property Assessment Corporation (MPAC), not to what you paid. Check the assessed value on the specific unit before you underwrite.
For rent, I start with CMHC's Rental Market Survey (Canada Mortgage and Housing Corporation). In its 2025 Toronto data, published December 11, 2025, the average rent for a two-bedroom rental condo in the former City of Toronto, York and East York was $3,161 a month in October 2025, with a condo vacancy rate of 1.0%.
Across the Toronto CMA (census metropolitan area, the wider region), the two-bedroom condo average was $2,891. The data tables cover surveyed rental condos, rather than just newly advertised units.
What is the cap rate on a $1,000,000 Toronto condo?
Here is a hypothetical two-bedroom downtown unit. I have set the rent at $3,400 a month, above CMHC's average for the former City of Toronto, York and East York. The assessed value, condo fees and other expenses are also assumptions. Property tax uses the actual 2026 rate.
| Line item | Basis | Annual |
|---|---|---|
| Gross potential rent | $3,400 × 12 (hypothetical) | $40,800 |
| Vacancy allowance | 2% of rent (my assumption) | −$816 |
| Collected rent | $39,984 | |
| Condo fees | $750/month (hypothetical) | −$9,000 |
| Property tax | $700,000 assessed × 0.767311% | −$5,371 |
| Insurance | Hypothetical | −$600 |
| Repairs reserve | Hypothetical | −$1,000 |
| Leasing allowance | Half a month's rent per year | −$1,700 |
| NOI | $22,313 | |
| Cap rate | $22,313 ÷ $1,000,000 | 2.23% |
I use a 2% vacancy allowance even though CMHC measured 1.0% in that broader area. A single tenant turnover with a slow month costs more than a year at the market average. One unit can experience a very different vacancy pattern.
This example produces a 2.23% operating yield before financing. To reach a 4% cap rate on the same NOI, the price would need to be about $558,000.
What is a good cap rate for a Toronto condo?
I do not use a single target for every condo. My test is comparative. I set the condo's cap rate against the yield on safe alternatives and ask whether the gap pays for vacancy, special assessments and the work of being a landlord.
Here the comparison is stark. In early July 2026 the major banks' posted five-year GIC rate (a guaranteed investment certificate) was 2.75%, above this unit's 2.23%.
When a condo's cap rate sits below the posted GIC rate, I ask what future income or price growth would justify the additional property risk. That can still be a reasonable decision. It should be a conscious one. I discussed rental-market conditions in The Rent Decline Paradox.
How is cash-on-cash return calculated?
Cash-on-cash return measures what your own money earns once financing is in the picture. The formula: cash-on-cash = annual cash flow ÷ total cash invested. Cash flow is NOI minus your yearly mortgage payments. Cash invested is your down payment plus closing costs.
Closing costs are real money
A standard Toronto condo purchase attracts provincial and municipal land transfer tax. Using Ontario's published provincial brackets (0.5% up to $55,000, rising to 2.0% between $400,000 and $2,000,000), the provincial tax on $1,000,000 is $16,475. Toronto's municipal land transfer tax uses the same brackets at this price, adding another $16,475.
For properties containing one or two single-family residences, including individual condos, Toronto's municipal rates step up above $3,000,000 under graduated rates that took effect April 1, 2026, reaching 8.60% on the portion over $20,000,000. For luxury buyers, that changes the closing-cost line materially.
The financed example
Assume 25% down ($250,000), a $750,000 mortgage, a 30-year amortization and a 4.50% fixed rate. All of those terms are hypothetical. Add $32,950 in land transfer tax and an assumed $2,500 for legal fees and closing disbursements, including the municipal tax administration fee. Total cash invested is $285,450.
The calculation assumes monthly payments and interest compounded semi-annually. Dollar amounts are rounded independently from unrounded calculations. This is a resale rental purchase with no transfer-tax rebates or additional foreign-buyer taxes assumed.
| Item | At 4.50% (assumed) | At 6.09% (posted) |
|---|---|---|
| NOI | $22,313 | $22,313 |
| Mortgage payments | −$45,379 | −$54,041 |
| Annual cash flow | −$23,067 | −$31,729 |
| Cash-on-cash | −8.1% | −11.1% |
The second column uses the Bank of Canada's posted five-year conventional mortgage rate, which stood at 6.09% in the major banks' weekly posting of July 1, 2026. Posted rates are a published benchmark, rather than a borrower-specific quote. I show it as a stress case, not a forecast.
Of the 4.50% case's $45,379 in first-year payments, roughly $12,189 is principal (the part that pays down the loan). That builds equity, but it does not arrive in your bank account. Even counting it, the unit is about $10,900 short in year one.
At these terms, rent would need to be about $5,450 a month to cover operating costs and mortgage payments. That keeps the 2% vacancy allowance and half-month leasing allowance proportional to rent, with other expenses unchanged.
How do I underwrite a condo rental for clients?
My approach is conservative by design. I would rather a client be pleasantly surprised than short every month.
- Rent from evidence: I start with CMHC averages, then adjust for the specific building, floor and finishes using recent leased comparables.
- Tax from the assessment: I use the unit's actual MPAC value and the current year's city rate, never a rule of thumb.
- Condo fees with a trend: I read the status certificate (the corporation's disclosure package) and the reserve fund study. Fee increases flow straight out of NOI.
- Financing at today's terms: I run the actual quoted rate and a stress case, and I look past the term to renewal.
One caveat matters more than most. Rent increases for many existing tenancies are capped by Ontario's rent increase guideline: 2.1% for 2026 and 1.9% for 2027, unless the Landlord and Tenant Board approves an above-guideline increase.
For condos in new buildings or additions, the guideline exemption applies where the building or addition was first occupied for residential purposes after November 15, 2018. A unit's first lease date alone does not establish exemption. Verify the building's occupancy history before projecting rent growth.
Tax treatment of rental income, interest and depreciation is a separate question. Have your accountant model it for your situation before you rely on any after-tax number.
What this means for you
Luxury buyers: if you are buying a condo you may lease out later, run the cap rate now. It helps you weigh the operating income against the purchase price, and above $3,000,000 the higher Toronto land transfer tax raises your cost basis.
Investors: I would treat a sub-3% cap rate as a growth thesis and size the monthly shortfall you can carry for years, not months. If income is the goal, I would also compare purpose-built rental; I discussed that approach in The Case for Multifamily.
Rental owners: recalculate NOI each year with the new tax rate, your actual condo fees and current rent. If cash-on-cash has been negative for some time, review whether holding still fits your plan. I discussed that decision in Investor Liquidation and the End-User Calculus.
Frequently asked questions
Does the cap rate include my mortgage?
No. Cap rate is calculated before financing so properties can be compared on equal terms. Your mortgage shows up in cash flow and cash-on-cash return.
What property tax rate should I use for a Toronto condo in 2026?
For an occupied residential condo, the City of Toronto's 2026 total residential rate is 0.767311%. Multiply it by the unit's MPAC assessed value, not the purchase price.
Is a negative cash-on-cash return always a bad sign?
Not always, but it means the modelled annual cash flow is negative. Principal repayment, future income and appreciation are separate considerations. Make sure that is a choice you can sustain if rents or values stay flat.
Where can I find reliable Toronto condo rent data?
CMHC's annual Rental Market Survey reports average condo rents by bedroom type and area. I treat it as a starting point and refine it with recent leases in the specific building.
Sources
- Property Tax Rates and Fees, City of Toronto
- By-law 133-2026, Tax Levy By-law for 2026, City of Toronto
- Rental Market Reports: Major Centres, Toronto 2025 data tables, Canada Mortgage and Housing Corporation
- Toronto 2025 rental market data tables, CMHC
- Calculating Land Transfer Tax, Government of Ontario
- Municipal Land Transfer Tax Rates and Fees, City of Toronto
- Residential Rent Increases, Government of Ontario
- Interest Rates Posted for Selected Products by the Major Chartered Banks, Bank of Canada; July 1, 2026 historical observations