What is an appropriate Cap Rate for Toronto Rental Properties?

Cap rates in the GTA have been steadily diminishing as Buyer’s pay higher prices.

Nowadays, most income properties in the downtown core are priced and sell at around a 3.5 cap rate. This rate of return has steadily come down over the years as Toronto prices have increased. If you are looking for a better return that can match other investments outside of real estate, you may have to consider investing outside of Toronto.

I often get asked what is an acceptable cap rate? Is a return under 4% really enough for all the time and effort you will put in and is it enough for the inherent risk that real estate has?

There is no right or wrong answer to this question. If you want to own a duplex or triplex in Toronto, then quite simply this is the reality of our current market. If you want the asset, then you have to pay for it. If you ask me, NHL players are paid way too much to shoot a puck into a net, and arguably do not do much better than some Zamboni drivers. However, that is what the market bears. The concept of “worth” is a questionable one. It’s like what constitutes art. To some, having an asset that someone else pays down your mortgage on and eventually increases in value is enough and it doesn’t matter what the return rate is. To others (myself included), the return is the only thing that matters when you are buying investment real estate. You have to decide your own short and long term investment objectives.

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