Rental yield: the calculation most small investors get wrong

'The triplex yields 6.4%.' You hear it on every showing, and it's almost always produced the same way: annual rents divided by asking price. That calculation has a name — gross yield — and a real use: quickly comparing two buildings. It tells you nothing, however, about what the building will actually earn you.

This article works the full calculation on a Montreal triplex, shows the six mistakes that inflate the headline figure, and explains why negative cashflow can still correspond to a good investment.

Starting point: a $950,000 triplex

Three units rented at $1,700 each, or $5,100 a month and $61,200 a year in gross income. Purchase price $950,000, acquisition costs (transfer duties, notary, inspection) $25,000. For context: half of the plexes sold in the Montreal area in the first quarter of 2026 exceeded $675,000, and the median plex price there approached $840,000 according to APCIQ statistics — so a triplex in good condition sits above the median, which includes many duplexes.

Gross yield: $61,200 ÷ $950,000 = 6.44%. That's the number that circulates. Let's see what survives the six corrections.

Mistake 1 — Using projected rent instead of current rent

'Rents are below market, you'll be able to push to $1,900.' Maybe. But you're buying the current leases, not the hoped-for ones. In Quebec the lease follows the building: you inherit the rent and existing conditions, and bringing them to market takes months of procedure — when it's possible at all.

Mistake 2 — Not reserving for vacancy and bad debt

No building collects 12 months of rent out of 12 for 10 years. The vacancy rate for Montreal apartments stood at 2.9% in 2025 according to CMHC, but it is turnover that really costs: between 8.7% and 16.9% of units changed tenant within the year depending on the rent quartile, and every change creates a re-leasing period. Between vacancy, late payments and defaults, a 5% reserve is the realistic minimum on a plex with normal turnover.

On $61,200, that removes $3,060. Effective income: $58,140.

Mistake 3 — Forgetting the major-repair reserve

This is the costliest mistake, because it stays invisible for years then lands all at once. A roof, windows, a heating system or an exterior staircase are not routine maintenance: they are capital expenses that must be spread year after year.

An owner who reserved nothing for eight years and receives a $35,000 roof invoice wasn't unlucky: they simply collected, for eight years, a return they never had.

The correct calculation: from gross to cap rate

Effective income $58,140 − operating expenses $20,200 = $37,940 of net operating income (NOI).

Cap rate: $37,940 ÷ $950,000 = 3.99%.

The gap between 6.44% and 3.99% isn't a detail: 38% of the headline return disappears once real expenses are counted. It's also, precisely, the gap between a building that looks interesting and one that is.

Mistake 4 — Comparing a leveraged return to an unleveraged one

The cap rate deliberately ignores financing, which lets you compare two buildings independently of how each buyer finances them. But your personal return depends entirely on your mortgage.

With 20% down ($190,000) and a $760,000 loan at 5.0% amortized over 25 years, the monthly payment is about $4,443, or $53,316 a year. That 5.0% is a modelling assumption, not a quote: a rental building not occupied by its owner finances above insured residential rates, and rates move from quarter to quarter. Replace it with your lender's actual quote — it is the input that moves the final result the most.

Pre-tax cashflow: $37,940 − $53,316 = −$15,376 a year, roughly $1,281 a month out of your own pocket.

Mistake 5 — Treating principal repayment as a loss

This is the mirror image of the earlier mistakes: it makes the investment look worse than it is. Of the $53,316 paid in year one, about $37,645 is interest — a genuine expense — and about $15,670 repays principal. That second amount doesn't leave your net worth: it moves from your account into your equity.

Measured against the down payment and costs ($215,000), those three readings give −7.2%, +0.1% and +13.4% respectively. Three figures, one building, no contradiction: they answer three different questions. Note the tipping point: once principal repayment is counted, the building is no longer in deficit — it breaks even. That is the whole difference between 'it costs me $1,281 a month' and 'it costs me nothing, but it ties up my liquidity'.

Mistake 6 — Forgetting the cost of your own time

An owner who self-manages charges the building nothing, and concludes that self-management is free. It isn't: it's simply paid in hours rather than dollars.

On a triplex, count the listing work on every departure, sorting applications, showings, file verification, signing, maintenance calls and year-end accounting. The day you compare self-management to delegated management, those hours — and the cost of the mistakes a structured process avoids — belong in the balance, not just the fees.

Recap: the six corrections