In recent years, multifamily real estate has gained traction among investors looking for stable, long-term returns. Urban centers across Canada have experienced rapid population growth, rising housing demand, and constrained supply. These dynamics make multifamily properties an appealing investment vehicle, but assessing return on investment (ROI) in this sector requires careful consideration of multiple financial, geographic, and regulatory factors.

Understanding ROI in Multifamily Real Estate

ROI in real estate generally refers to the net profit generated by a property relative to the capital invested. For multifamily properties, or buildings containing multiple residential units under single ownership, ROI reflects not only rental income and appreciation but also the unique costs and risks associated with managing multiple tenants.

A basic ROI calculation looks like this : ROI = (Net Annual Income / Total Investment Cost) x 100

Net income includes rent collected minus operating expenses, while total investment cost factors in the purchase price, financing costs, taxes, legal fees, renovations, and ongoing maintenance.

However, this is an oversimplified analysis. For urban multifamily properties, evaluating ROI often means integrating additional metrics such as cash-on-cash return, internal rate of return (IRR), cap rate, and appreciation potential.

Key Metrics in Evaluating ROI Cap Rate (Capitalization Rate)

The cap rate is a widely used metric to assess a property’s income-generating potential relative to its market value. It is calculated by dividing the property’s net operating income (NOI) by its current market value.

Cap Rate = (NOI / Market Value) x 100

In Canada’s major cities, cap rates tend to be lower, due to high property prices. While a low cap rate may suggest lower income relative to value, it can also indicate a lower-risk investment in a high-demand location.

Cash-on-Cash Return

This metric compares the cash income generated by a property with the actual cash invested, usually on an annual basis. It is particularly useful for evaluating the performance of leveraged investments, where a mortgage covers part of the purchase.

IRR (Internal Rate of Return)

IRR estimates the total return over the holding period, factoring in both income and potential appreciation. While more complex to calculate, IRR provides a clearer picture of long-term performance, especially in markets with expected price growth.

Market Factors Affecting ROI in Urban Canada

Population Growth and Immigration
Some Canadian cities have seen strong immigration-driven population growth, creating persistent demand for rental housing. Multifamily properties in these areas benefit from lower vacancy rates and rising rents, directly boosting ROI.

Supply Constraints
Urban development can face challenges such as zoning restrictions, limited land availability, and slow permitting processes. These barriers restrict the supply of new rental units, increasing the value and income potential of existing multifamily assets.

Rising Rents
In many Canadian cities, rental rates have outpaced inflation. Data from the Canada Mortgage and Housing Corporation (CMHC) in 2024 indicates that rent growth for two-bedroom purpose-built apartments rose to 8.0% between October 2022 and October 2023 and outpaced inflation (4.7%) during that period.

Interest Rates and Financing Costs
Higher borrowing costs can reduce ROI by increasing debt service payments, especially in highly leveraged deals. However, for investors with strong equity positions or access to favourable financing terms, this may be offset by high rental income and long-term appreciation.

Operating Expenses and Risk Factors

Multifamily properties in urban centers often carry significant operating costs, including property taxes, insurance, utilities, management fees, repairs, and vacancy losses. These costs vary considerably by location and building type. For example, older properties may require higher capital expenditures to meet municipal codes or compete with newer developments.

Investors must also consider regulatory environments, including rent control laws, which can limit rental increases and impact income growth. Moreover, tenant turnover, maintenance issues, and compliance obligations can add unpredictability to operating margins.

Value-Add Opportunities

Renovation and repositioning strategies, such as upgrading units, improving amenities, or converting underutilized spaces, can significantly boost rental income and property value. These value-add approaches can yield higher ROI than more passive buy-and-hold strategies, especially in cities with older housing stock.

Additionally, developments near new transit infrastructure or urban redevelopment zones may appreciate faster, amplifying returns over time.

Evaluating the ROI of multifamily properties in Canada’s urban centers involves more than just comparing purchase price and rent. It requires a nuanced analysis of local market dynamics, regulatory frameworks, financing conditions, and property-specific characteristics. While high acquisition costs and regulatory hurdles can compress margins in some cities, strong population growth, limited supply, and rising rents continue to support long-term returns.

Evaluating The ROI of Multifamily Properties in Canada’s Growing Urban Centers by Ryan Coyle | Canadian Real Estate Wealth