Cap Rate: Income, Value, and Rate — Solve for Any of the Three
Capitalization problems are the T-method with investment vocabulary: net operating income is the part, value is the total, the cap rate connects them. The exam's twist is making you build NOI first — and its distractors are built from forgetting which expenses count.
The formula
Cap rate = NOI ÷ Value · Value = NOI ÷ Cap rate · NOI = Value × Cap rate
- NOI
- effective gross income minus operating expenses
- Not in NOI
- debt service (mortgage payments) and depreciation are NOT operating expenses
- Value
- what the income stream is worth at that rate
Try it live
Every intermediate step is shown — the goal is that on exam day you can run the same chain on paper.
Solver — enter the two you know
- Setup usedCap rate = 15,000 ÷ 250,000
- Answer
- 6%
The method, worked in exam style
A building grosses $96,000 with $6,000 vacancy losses and $30,000 operating expenses. Its owner also pays $28,000 a year on the mortgage. At a 7.5% cap rate, what is the value?
- NOI: 96,000 − 6,000 − 30,000 = $60,000. The $28,000 debt service is ignored — financing is not an operating expense.
- Value = NOI ÷ rate = 60,000 ÷ 0.075.
- 60,000 ÷ 0.075 = $800,000.
Answer: $800,000
The classic trap
Subtracting the mortgage payment before capitalizing (giving $426,667 here) is THE cap-rate distractor. NOI is a property number, not an owner number: debt service and depreciation never reduce it.
Practice problems
Work each on paper first, then open the solution. If your setup differs from the solution's first line, that — not arithmetic — is what to fix.
1. A property produces $45,000 NOI and is priced at $600,000. What cap rate does that price imply?
Show the solution
- Rate = NOI ÷ Value = 45,000 ÷ 600,000 = 0.075.
Answer: 7.5%
2. An investor requires an 8% return. What is a property producing $52,000 NOI worth to them?
Show the solution
- Value = 52,000 ÷ 0.08 = 650,000.
Answer: $650,000
3. If a $750,000 property sells at a 6% cap rate, what NOI does the price assume?
Show the solution
- NOI = Value × Rate = 750,000 × 0.06 = 45,000.
Answer: $45,000
Math is one domain — the diagnostic measures all of them
The free 24-question adaptive diagnostic finds the difficulty level where your setup breaks down — in math and every other blueprint domain — and reports a Readiness Score with a stated confidence range.
Keep going: Gross rent multiplier · The T-method · Real Estate Math on the exam
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