Which measure should you use?
Cap rate compares operating income with price. Cash-on-cash compares cash flow with cash invested. DSCR compares operating income with debt payments. None of them replaces a full review of the property, financing and assumptions.
A property can have a positive cap rate and negative monthly cash flow. Cap rate ignores financing; the mortgage still needs paying. A cash-on-cash ranking can also put a loss-making property first when every alternative has a lower return. Read the amount, definition and assumptions beside the rank.
The calculations here use fictional Canadian-dollar scenarios from the TrueTakeHome demonstration workbook. They are not market benchmarks, advertised properties or promised returns.
The formulas, side by side
| Measure | Formula used here | Question it helps answer |
|---|---|---|
| Cap rate | Annual NOI ÷ purchase price | How does operating income compare with the price, before financing? |
| Cash-on-cash return | Annual cash flow after capital reserve ÷ total initial cash invested | What cash result does the model show relative to the cash committed? |
| DSCR | Monthly NOI ÷ monthly mortgage principal and interest | How much of the debt payment is covered by operating income? |
Use annual amounts on both sides of DSCR if you prefer; the ratio is the same when the periods and definitions are consistent. Do not divide annual NOI by one monthly payment. Write down whether the cash-flow numerator is before or after reserve and what the cash-invested denominator includes.
Our model's NOI excludes debt payments, capital reserve contributions, income tax and CCA. Its cash-on-cash denominator includes the down payment, modelled closing costs, upfront work and starting cash reserve. Another source may define these measures differently, so reconcile the inputs before comparing published figures.
Why positive NOI can still produce negative cash flow
The fictional Maple Duplex costs $650,000. Its annual NOI is $36,056, giving 5.55% cap rate when rounded. Its monthly mortgage payment is $3,098.77, while monthly NOI is about $3,004.67. That leaves about −$94.11 before a planned $150 monthly capital reserve contribution, or −$244.11 after reserve.
The annual cash result after reserve is about −$2,929.28. Dividing by $152,375 initial cash invested gives −1.92% cash-on-cash return. DSCR is about 0.97×. The operating income is positive, but it does not fully cover the modelled mortgage payment.
The example makes no assumption about future appreciation, sale proceeds or the buyer's tax position. Principal repayment builds down the loan balance, but it does not put that month's mortgage cash back in the buyer's bank account. Read the full Canadian cash-flow walkthrough to trace the expense lines.
Compare three properties without changing the definitions
| Property | Monthly cash flow | Cap rate | Cash-on-cash | DSCR |
|---|---|---|---|---|
| Maple Duplex · Ontario | −$244.11 | 5.55% | −1.92% | 0.97× |
| Cedar Townhome · British Columbia | −$1,238.24 | 3.17% | −7.97% | 0.61× |
| Prairie Fourplex · Manitoba | $455.36 | 6.99% | 3.44% | 1.31× |
Prairie ranks highest by cash-on-cash under these specific inputs. That is a model result, not a purchase recommendation. Its price, number of units, financing mode and costs differ from the other examples. Confirm whether the assumptions are supported before drawing a conclusion about the property.
A useful comparison keeps the treatment of vacancy, management, maintenance, reserves and closing costs consistent. If one property has a zero expense because it genuinely does not apply, record that. If the expense is unknown, obtain a quote or show an explicit assumption instead of treating the gap as a reliable zero.
What does a DSCR below 1.20 mean?
The analyzer flags DSCR below an editable 1.20 reference. In the model, 1.00 means NOI exactly matches the mortgage payment before the capital reserve; below 1.00 means it does not. A ratio of 1.20 means NOI is 1.2 times the mortgage payment under the stated definitions.
1.20 is a review reference, not a universal Canadian lending rule. Lenders can use different income treatment, expenses, debt-service calculations and thresholds. The lender must confirm the relevant financing criteria. A cash purchase has no mortgage debt-service denominator; the analyzer displays that result as not applicable.
Do not confuse property DSCR with the borrower's mortgage stress test. OSFI describes the minimum qualifying rate for uninsured mortgages, while CMHC has separate Income Property eligibility and underwriting information. Passing a spreadsheet reference does not mean the borrower or property is approved.
Use quick screens to ask better questions
Gross rent multiplier divides price by annual scheduled rent. The 1% screen compares scheduled monthly rent with price. A 50% reference considers a broad allowance for operating costs and vacancy before debt. These are rough screens; they do not establish suitable expenses, a fair value or whether a buyer should proceed.
Go back to the actual rent evidence, costs, condition and financing terms. For an existing homeowner weighing a sale, distinguish rental cash flow from home equity and estimated sale proceeds; those answer a different question.
The Canadian Rental Property Cash-Flow Analyzer for Google Sheets keeps the measures beside one another, with source assumptions and up to three live property columns. Use it to structure the conversation and record what still needs verifying.