Cap Rate = NOI / Value, and rearranged, Value = NOI / Cap Rate. Both directions worked for the NY exam.
Cap Rate = Net Operating Income ÷ Property Value
Rearranged: Value = NOI ÷ Cap Rate
Rearranged: Value = NOI ÷ Cap Rate
How to solve it, step by step
- Establish net operating income — gross income minus operating expenses, before any debt service.
- Divide NOI by value to find the cap rate, or divide NOI by the cap rate to find value.
- Express the cap rate as a percentage.
Worked examples
A building produces $60,000 NOI and sells for $750,000. Cap rate = $60,000 ÷ $750,000 = 8%.
Valuing a property: $80,000 NOI at a 8% cap rate → $80,000 ÷ 0.08 = $1,000,000. A lower cap rate produces a higher value.
What the NY exam actually asks
The exam tests the rearrangement more than the base formula. You are usually given NOI and a market cap rate and asked what the property is worth.
Try one yourself
A commercial property produces $96,000 in net operating income. Comparable buildings trade at a 6% cap rate. What is the indicated value?
Show the answer
$1,600,000. Value = NOI ÷ cap rate = $96,000 ÷ 0.06 = $1,600,000.
Common mistakes
- Using gross income instead of net operating income. NOI is after operating expenses but before debt service.
- Subtracting mortgage payments from NOI. Debt service is never an operating expense.
- Dividing the wrong way round when solving for value.
Questions students ask
Is the mortgage payment an operating expense?
No. Debt service is excluded from NOI entirely.
Does a higher cap rate mean a better property?
Not necessarily. A higher cap rate implies higher perceived risk and a lower value for the same income.
Related formulas
- The gross rent multiplier formula
- Area and acre conversions
- All 12 formulas — NY Real Estate Math Cheat Sheet
- Real Estate Math Calculator
Practise this. The free 10-question math quiz drills these formulas, and the free timed practice exam puts them under exam conditions.
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