How to Analyze the Return on an Income Property

Investing in an income property can be a smart way to generate passive income, build long-term wealth, and benefit from real estate market growth. But for an investment to be profitable, it takes more than just a well-located building — you need to analyze the return with precision and strategy.

Here’s a practical guide to understanding the key performance indicators every investor should know before buying an income property in Quebec.

1. Gross Annual Income

The first step is calculating the gross annual rental income, which is the total of all rents collected in a year, before any expenses.

Example: A triplex with three units rented at $1,200/month would generate

1,200 x 3 x 12 = $43,200 in gross annual income.

This is the foundation for further financial analysis.

2. Capitalization Rate (Cap Rate)

The cap rate is one of the most commonly used metrics to compare income properties. It’s the ratio between the net operating income (NOI) and the purchase price.

Formula:

Cap Rate = Net Income / Purchase Price

The net income is calculated by subtracting all operating expenses (taxes, insurance, maintenance, management fees, etc.) from the gross income.

Example:

Net income: $28,000

Purchase price: $560,000

Cap rate = 28,000 / 560,000 = 5%

What’s considered a “good” cap rate depends on the market, but in a stable urban market like Montreal, 4% to 6% is often reasonable.

3. Gross Rent Multiplier (GRM)

The GRM helps quickly assess if a property is overpriced or potentially profitable based on its income.

Formula:

GRM = Purchase Price / Gross Annual Income

Example:

Purchase price: $600,000

Gross income: $50,000

GRM = 600,000 / 50,000 = 12

The lower the GRM, the more attractive the property’s short-term income potential. A GRM of 10 or below is generally considered favorable.

4. Cash Flow

This is the amount of money left in your pocket after paying all expenses, including your mortgage payments. It can be positive (profitable) or negative (loss).

Formula:

Cash Flow = Net Income – Mortgage Payments

Positive cash flow means the property pays for itself and still earns you profit each month, even if modest.

5. Cash-on-Cash Return

For investors, the cash-on-cash return is a clear indicator of how efficiently your initial investment is working for you.

Formula:

Return = Annual Cash Flow / Down Payment

Example:

Annual cash flow: $5,000

Down payment: $100,000

Return = 5,000 / 100,000 = 5%

This is a useful metric to compare various investment opportunities (e.g. real estate vs. RRSPs or TFSAs).

6. Use the Right Tools on Vendre.ca

To simplify your income property analysis, Vendre.ca offers Investor Mode, a unique feature designed specifically for real estate investors. It gives you:

In just a few clicks, you get a clear, strategic overview to support smarter investment decisions.

In Conclusion

Analyzing the return on an income property isn’t complicated — but it’s crucial. By understanding key metrics like cap rate, GRM, cash flow, and cash-on-cash return, you’ll be better equipped to make profitable, low-risk investments.