Exam math
Cap rate, NOI and gross rent multiplier
The income approach in two steps: build net operating income, then capitalize it. Most missed questions here come from skipping vacancy, mixing gross and net income, or subtracting a financing item from property operations.
Your figures
Annual gross rent at full occupancy under the exercise's stated contract or market-rent assumptions. This is the rent figure used for the annual GRM.
Deducted FIRST, before operating expenses. Skipping this step is the most common error in a multi-step income question.
Annual property income outside scheduled rent, such as parking or laundry, when the problem supplies it. Add it after vacancy and collection loss.
Typical items include taxes, insurance, management, maintenance and owner-paid utilities. Follow the problem's stated convention for replacement reserves. Never include debt service, income tax, accounting depreciation or capital expenditures.
Taken from comparable sales. A lower rate normally signals lower perceived risk or stronger growth expectations.
Used to derive the implied cap rate and the gross rent multiplier.
Value from the cap rate
$1,266,667
NOI of $76,000 divided by a 6% capitalization rate. At your price the implied cap rate is 7.6%.
Price divided by GROSS income. No deduction for vacancy or expenses.
The IRV triangle
Income over Rate gives Value. Income over Value gives Rate. Rate times Value gives Income. Cover the unknown with a finger and the remaining two show the operation. Use annual NOI and a decimal capitalization rate. A zero or negative NOI does not produce a meaningful positive value under this simple direct-capitalization model.
Complete results, no email, no account. Calculation methods are checked with regression cases. Inspect your inputs, units and the stated assumptions. How we verify
How this is calculated
The NOI ladder runs in a fixed order. Start with the annual gross rent specified for full occupancy, using the stated contract or market-rent assumptions. Deduct vacancy and collection loss, then add other property income supplied by the problem to reach effective gross income. Deduct operating expenses to reach net operating income.
What is not an operating expense is where marks are lost. Debt service is a financing cost. Book depreciation is a tax construct. Capital improvements are not operating costs. The owner's income tax is personal. All four are excluded, because NOI describes the property rather than the owner's financing or tax position, and that is exactly what makes it comparable across buildings. Replacement reserves are treated differently across reporting conventions, so follow the label and instructions in the problem rather than assuming a reserve always belongs or never belongs.
Value then follows from the IRV triangle: NOI divided by the capitalization rate. The gross rent multiplier is a different measure entirely, dividing price by GROSS income with no deduction at all, and can be used to estimate value by applying a comparable multiplier to the subject's matching gross rent. It is a simpler method than a full income analysis and does not account directly for differences in expenses.
Full coverage of the approaches, the depreciation vocabulary and the value principles is in Property Valuation and Financial Analysis, which is 14% of the examination.
Common questions
How do you calculate net operating income?
Start with the stated gross scheduled rent, subtract vacancy and collection loss, and add any other property income supplied by the problem. Subtract operating expenses to find NOI. Do not subtract debt service, accounting depreciation, capital expenditures, or the owner's income tax in this calculation.
What is the IRV formula?
Income equals Rate times Value, which rearranges to Value equals Income divided by Rate, and Rate equals Income divided by Value. The income used is net operating income. Cover the unknown in the triangle and the remaining two show the operation.
Does the gross rent multiplier use gross or net income?
Gross, always. Divide price by the matching gross rent or gross income figure. Do not deduct vacancy or operating expenses, and keep monthly data with monthly data or annual data with annual data.
What does a low cap rate mean?
A lower cap rate means less annual NOI relative to price. It can reflect lower perceived risk or stronger growth expectations, but the ratio alone does not prove either. A cap rate excludes financing, resale gains, and other parts of total investment return.