Vacancy Rate and Operating Expense Assumptions for Canadian Rental Properties

Use the higher of your city’s CMHC vacancy rate and 3–5%, then build expenses line by line instead of trusting a single percentage. Vacancy and operating expenses are the two assumptions that turn gross rent into net operating income (NOI), and NOI drives everything else: cap rate, cash flow, debt coverage and value.

A seller’s listing usually shows the most flattering version: 0–2% vacancy, no management fee because the owner self-manages, and repairs from a quiet year. A lender, an appraiser and the next buyer will all rebuild those numbers with their own assumptions. If your analysis is more optimistic than theirs, you will find out at the financing stage, after you have paid for inspections and an appraisal.

The goal is not to be pessimistic. It is to use the numbers the building will be judged on, so the deal still works when someone else checks it.

CMHC’s 2025 Rental Market Report put Canada’s purpose-built rental vacancy rate at 3.1%, up from 2.2% in 2024 and above its 10-year average. CMHC linked the increase to record rental completions and slower population growth. Rates for major centres:

These are city-wide averages for purpose-built apartments. CMHC also publishes rates by neighbourhood zone and bedroom count, which are a better match for a specific building. The survey runs each October, so check that you are using the latest report.

A city’s vacancy rate is an average across thousands of units; in a small building, one empty unit is a much bigger share of income. In an 8-unit building, a single unit empty for one month is 1 of 96 unit-months, or 1.0% vacancy. If each unit turns over every three years and sits empty for a month between tenants, that alone is 2.8%, before any tenant stops paying.

That is why your allowance should cover three things, not one:

• Market vacancy: the CMHC rate for your zone and unit type.
• Turnover time: cleaning, painting and showing a unit between tenants, which is often longer in older buildings.
• Bad debt: rent you never collect. Eviction timelines at provincial landlord and tenant boards can stretch to months, so a single non-paying tenant can cost several months of rent.

For most multiplexes, 3% is a floor rather than a target, and 5% is a reasonable default in softer markets or for buildings with frequent turnover.

Canadian lenders recalculate NOI with their own vacancy and expense assumptions, and they rarely accept a seller’s figures as presented. Practices differ by lender, but these adjustments are common on 5+ unit buildings:

• Vacancy: the higher of local market vacancy and a floor, commonly 3–5% for banks and credit unions, even when the rent roll is full.
• Management: a fee of roughly 3–5% of effective gross income whether or not you manage the building yourself, because the building has to work if a manager is ever hired.
• Repairs and reserves: a per-unit allowance for maintenance plus a replacement reserve for roofs, boilers and appliances, using the higher of the building’s history and the lender’s own benchmark.
• Taxes, insurance and utilities: taken from actual bills, often the most recent 12 months, rather than the seller’s estimates.

CMHC-insured loans follow the same pattern: CMHC asks the lender to explain the vacancy rate and expenses used, and checks them against market data and its own benchmarks. The result is the NOI your debt coverage ratio and loan size are based on.

List every recurring cost of running the building, but leave out mortgage payments, income tax, depreciation and one-time renovations. Here are the lines in our 8-unit example and what to check for each:

Many investors also add a replacement reserve, a yearly amount set aside for big-ticket items, so that a roof or boiler does not arrive as a surprise. Other lines to watch for: elevator and fire-safety contracts, pest control, garbage removal, rental licensing fees and on-site superintendent pay.

The operating expense ratio (OER) is total operating expenses divided by effective gross income, the rent you actually collect after vacancy. It is a quick way to sanity-check a listing.

Operating expense ratio = Operating expenses ÷ Effective gross income

In our example, $55,920 ÷ $162,960 = 34.3%. Some analysts divide by gross potential rent instead, which gives 33.3% here, so check which version a broker is quoting.

As a rule of thumb, many small Canadian multiplexes where tenants pay their own in-suite hydro land between about 30% and 40%. Buildings where the owner pays heat and all utilities, older buildings, and buildings in cities with high property taxes often run 40–50%. A listing showing 20–25% usually means something is missing: management, repairs, a realistic insurance quote, or utilities the owner pays.

Use the ratio as a check, not a shortcut. Two buildings at 35% can have very different risks if one has a new roof and the other needs one.

Small changes in vacancy and expenses produce large changes in value and loan size, because every dollar of NOI is multiplied by the cap rate and by the lender’s coverage test. Here is the same 8-unit building under a seller’s assumptions and a lender’s:

The lender column uses a management fee of 4% of effective gross income and a $250-per-unit reserve. A $5,024 drop in NOI takes about $91,800 off the value and $60,600 off the loan. Each extra point of vacancy costs $1,680 of NOI, and a 30% jump in the insurance premium costs $2,880 a year. For how NOI becomes cash flow after the mortgage, see rental property cash flow in Canada.

PropStack starts every deal with regional expense benchmarks, so a listing with missing lines does not look better than it is. You set the vacancy rate, property management percentage, taxes, insurance and maintenance reserve yourself, and the calculator shows NOI, cap rate, cash flow, DSCR and break-even occupancy as you change them.

A useful habit is to save two scenarios for every deal: the seller’s numbers and your lender-style numbers. If the deal only works in the first one, you know what to negotiate. Try it on a listing, no account needed.