- Official section
- National III.C: Income Approach to Value
- Broker weight
- Part of 8% of the national portion
- Expected scored items
- The current PSI broker outline assigns about 8 of 100 scored national items to Valuation
Income-method comparison
Cap rate vs. GRM
Look at the income line before reaching for a formula. If the problem gives NOI and a percentage rate, use direct capitalization. If it gives comparable sale price and gross rent, derive a multiplier. The two methods can both produce value, but they speak different mathematical languages and cannot swap inputs.
Last updated: August 1, 2026
What is the difference at a glance?
Short answer: Cap rate is NOI divided by value and is expressed as a percentage. Direct-capitalization value is NOI divided by cap rate. GRM is sale price divided by gross rent and is expressed as a multiplier. GRM value is subject gross rent times the selected multiplier. Cap rate uses income after operating expenses; GRM uses gross rent and does not explicitly subtract expenses. A higher cap rate lowers value when NOI is fixed, while a higher GRM raises value when rent is fixed. Match annual NOI with an annual rate and monthly rent with a monthly GRM. Never treat cap rate as mortgage rate or GRM as a percentage.
Actual capitalization analysis requires a stabilized NOI, lease and expense review, comparable transactions, consistent property rights, market-supported rates, risk and growth expectations, and an effective date. GRM is a simplified market comparison and can mislead when expenses, vacancy, rent definitions, or property condition differ. This guide teaches exam formulas and distinctions, not appraisal, lending, tax, or investment advice. Sources were checked through August 1, 2026.
What changes from one term to the next?
- Terms
- Cap rate vs. GRM
- Difference
- Cap rate is an NOI-to-value percentage. GRM is a sale-price-to-gross-rent multiplier.
- Question cue
- Net-income rate versus gross-rent multiple.
- Terms
- Percentage vs. multiplier
- Difference
- A cap rate such as 8% becomes 0.08 in arithmetic. A GRM such as 120 is used as the multiplier 120, not 120%.
- Question cue
- Decimal rate versus whole-number multiple.
- Terms
- NOI vs. gross rent
- Difference
- NOI is income after operating expenses. Gross rent is measured before those expenses.
- Question cue
- Cap-rate input versus GRM input.
- Terms
- Higher cap rate vs. higher GRM
- Difference
- With income fixed, a higher cap rate lowers value, while a higher GRM raises value.
- Question cue
- Division inverse versus multiplication direct.
- Terms
- Cap rate vs. mortgage rate
- Difference
- Cap rate relates NOI to total property value. Mortgage rate is the price of borrowed funds.
- Question cue
- Property performance versus debt price.
- Terms
- Cap rate vs. cash-on-cash return
- Difference
- Cap rate uses NOI and total value. Cash-on-cash uses after-debt cash flow and equity cash invested.
- Question cue
- Unlevered property measure versus levered equity measure.
- Terms
- Overall cap rate vs. discount rate
- Difference
- An overall cap rate converts one year's income to value. A discount rate converts multiple future cash flows to present value in yield capitalization.
- Question cue
- Single-year capitalization versus multi-year present value.
- Terms
- Monthly GRM vs. annual GRM
- Difference
- Monthly GRM divides price by monthly rent. Annual GRM divides price by annual rent, so their numerical sizes differ by a factor of 12.
- Question cue
- Match the comparable and subject period.
- Terms
- Market extraction vs. arbitrary rule
- Difference
- Extraction derives a rate or multiplier from verified comparable transactions. An arbitrary rule applies a number without market support.
- Question cue
- Comparable evidence versus guess.
- Terms
- Indicated value vs. final appraisal conclusion
- Difference
- A formula creates one value indication. A final opinion reconciles data quality, method relevance, assumptions, and other evidence.
- Question cue
- One calculation versus supported conclusion.
How does the distinction change the answer?
Extract a cap rate
Scenario: A comparable income property sold for $1,500,000 and has stabilized annual NOI of $120,000.
- Use R = I divided by V.
- $120,000 divided by $1,500,000 equals 0.08.
- Convert 0.08 to 8%.
Answer: The extracted overall capitalization rate is 8%.
Capitalize subject NOI
Scenario: A subject property has stabilized annual NOI of $135,000. Comparable analysis supports an 8.5% cap rate.
- Convert 8.5% to 0.085.
- Use V = I divided by R.
- $135,000 divided by 0.085 equals about $1,588,235.
Answer: The direct-capitalization indication is about $1,588,235.
Extract and apply a monthly GRM
Scenario: A comparable sold for $360,000 and rents for $3,000 per month. A similar subject rents for $3,250 per month.
- Comparable GRM is $360,000 divided by $3,000, or 120.
- Use the same monthly-rent period for the subject.
- $3,250 times 120 equals $390,000.
Answer: The GRM value indication is $390,000.
The 8% conversion error
Scenario: A property has annual NOI of $80,000 and an 8% cap rate. A student divides $80,000 by 8 instead of 0.08.
- Eight percent means 8 per 100, or 0.08.
- $80,000 divided by 0.08 equals $1,000,000.
- Dividing by 8 produces $10,000, which is smaller than one year's NOI and fails a reasonableness check.
Answer: The correct indicated value is $1,000,000.
Expense differences weaken GRM
Scenario: Two buildings collect the same gross rent, but the subject pays far more for owner-provided utilities and repairs than the comparable used to derive GRM.
- GRM uses gross rent before subtracting expenses.
- The subject converts less of each rent dollar into NOI.
- Applying the comparable's GRM without analysis can overstate subject value.
Answer: Treat the expense difference as a major GRM limitation and prefer an income method that reflects supported NOI when available.
Cap rate is not the loan rate
Scenario: A lender offers a 6.5% mortgage. The subject's market evidence supports a 7.75% overall cap rate, and NOI is $155,000.
- The loan rate prices debt and does not replace the market cap rate.
- Use 0.0775 for direct capitalization.
- $155,000 divided by 0.0775 equals $2,000,000.
Answer: The indicated value is $2,000,000 using the supported 7.75% cap rate.
How do you solve a cap-rate-or-GRM question?
- Identify whether the problem provides NOI, gross rent, comparable sale price, cap rate, GRM, or a request to derive one of them.
- Write the exact income label and convert monthly figures to annual only when the chosen formula requires it.
- For cap rate, use R = NOI divided by value, V = NOI divided by R, or NOI = value times R.
- For GRM, use multiplier = comparable price divided by comparable rent and subject value = subject rent times multiplier.
- Convert cap-rate percentages to decimals but leave GRM as a multiplier.
- Confirm that NOI excludes debt service and that gross rent has not been reduced by operating expenses.
- Match period, property rights, income definition, expense convention, and comparable characteristics.
- Estimate direction, label units, round only at the instructed stage, and explain the method's limitation.
- Issue
- Income
- Cap rate
- Annual NOI
- GRM
- Gross rent
- Issue
- Expression
- Cap rate
- Percentage
- GRM
- Multiplier
- Issue
- Extract from sale
- Cap rate
- NOI divided by price
- GRM
- Price divided by rent
- Issue
- Value formula
- Cap rate
- NOI divided by rate
- GRM
- Rent times multiplier
- Issue
- Expense treatment
- Cap rate
- Explicit through NOI
- GRM
- Not explicitly deducted
- Issue
- Higher input effect
- Cap rate
- Higher rate lowers value
- GRM
- Higher multiplier raises value
- Issue
- Financing
- Cap rate
- Before debt service
- GRM
- No direct loan input
- Issue
- Period
- Cap rate
- Usually annual
- GRM
- Monthly or annual, but consistent
- Issue
- Best support
- Cap rate
- Reliable NOI and market rate
- GRM
- Comparable rent and expense patterns
- Issue
- Main weakness
- Cap rate
- Rate and NOI sensitivity
- GRM
- Hidden expense differences
Where do similar terms create traps?
- Trap
- Cap rate uses gross rent.
- Correction
- Direct capitalization uses NOI that is consistent with the overall rate.
- Trap
- GRM uses NOI.
- Correction
- GRM uses gross rent and does not explicitly subtract operating expenses.
- Trap
- Eight percent is entered as 8.
- Correction
- Enter 8% as 0.08 when dividing or multiplying in the cap-rate formulas.
- Trap
- A GRM of 120 means 120%.
- Correction
- GRM is a multiplier, so use 120, not 1.20.
- Trap
- A higher cap rate always creates a higher value.
- Correction
- With NOI fixed, a higher divisor produces a lower value.
- Trap
- Monthly NOI can be divided by an annual cap rate without adjustment.
- Correction
- Use annual NOI with an annual overall cap rate.
- Trap
- Monthly rent and annual GRM can be mixed.
- Correction
- The rent period used to derive and apply the multiplier must match.
- Trap
- Cap rate equals the mortgage interest rate.
- Correction
- Cap rate is an NOI-to-value relationship; the mortgage rate applies to debt.
- Trap
- Cap rate equals the investor's total return.
- Correction
- It omits financing, appreciation, tax effects, capital events, and multi-year timing.
- Trap
- One comparable's GRM applies to any rental property.
- Correction
- Property type, rent definition, expenses, vacancy, condition, location, and sale timing must be reasonably comparable.
- Trap
- The highest extracted rate or multiplier is automatically best.
- Correction
- Select support based on comparability and data quality, not which number produces a preferred result.
- Trap
- A formula result is automatically a final appraisal.
- Correction
- It is one indication requiring market support, assumptions, method review, and reconciliation.
Can you separate the terms in a new fact pattern?
These questions are original study items aligned to the published outline. They are not copied, recalled, or predicted PSI questions.
1. A property sold for $1,000,000 with annual NOI of $75,000. What is the cap rate?
- 7.5%
- 13.33%
- 0.75%
- 75%
Show answer and explanation
Answer: 7.5%
$75,000 divided by $1,000,000 equals 0.075, or 7.5%.
2. A comparable sold for $480,000 and rents for $4,000 per month. What is its monthly GRM?
- 120
- 12
- 0.0083
- 1,920
Show answer and explanation
Answer: 120
$480,000 divided by $4,000 equals a monthly GRM of 120.
3. A subject has NOI of $96,000 and the market cap rate is 8%. What is indicated value?
- $1,200,000
- $768,000
- $120,000
- $12,000
Show answer and explanation
Answer: $1,200,000
$96,000 divided by 0.08 equals $1,200,000.
4. Which method explicitly reflects operating expenses through its income input?
- Capitalization rate
- GRM
- Price per room only
- Cost per square foot only
Show answer and explanation
Answer: Capitalization rate
The cap-rate formula uses NOI after property operating expenses.
5. With NOI fixed, what happens to value when the cap rate increases?
- Value decreases
- Value increases
- Value stays identical
- NOI becomes gross rent
Show answer and explanation
Answer: Value decreases
Value equals NOI divided by the rate, so a larger divisor lowers the result.
Where do these ideas appear on the outline?
- Topic
- Income approach setting
- What to know
- Income-producing property, investor, anticipated benefit, rent, expense, NOI, gross rent, market participant, value, direct capitalization, gross rent multiplier, comparable sale, rate, risk, growth, and effective date
- Best exam move
- Use these methods when market participants care about property income and the problem supplies consistent income data.
- Topic
- Capitalization-rate definition
- What to know
- Overall rate, R, annual NOI, I, value, V, sale price, percentage, decimal, one-year relationship, going-in rate, terminal rate distinction, extraction, application, and consistency
- Best exam move
- Read cap rate as the share of property value represented by one year's NOI.
- Topic
- Capitalization formulas
- What to know
- R = I divided by V, V = I divided by R, I = V times R, T-bar, circle method, decimal conversion, percentage, annual income, value indication, exact rate, rounding, and algebra
- Best exam move
- Cover the unknown in I over R times V and convert the percentage to a decimal before arithmetic.
- Topic
- NOI input
- What to know
- Potential gross income, vacancy, collection loss, other income, effective gross income, operating expenses, replacement reserve convention, net operating income, annual period, stabilized operation, actual operation, and forecast
- Best exam move
- Complete the income waterfall and use annual NOI, not the gross-income subtotal.
- Topic
- NOI exclusions
- What to know
- Mortgage principal, mortgage interest, debt service, owner income tax, accounting depreciation, amortization, capital gain, owner distribution, entity overhead, personal cost, acquisition expense, and after-debt cash flow
- Best exam move
- Keep financing, owner tax, and accounting allocations below property NOI.
- Topic
- Cap-rate extraction
- What to know
- Comparable sale, verified price, stabilized NOI, property rights, sale date, condition, occupancy, leases, expenses, arms-length transaction, unusual financing, cap rate, adjustment, range, and reconciliation
- Best exam move
- For a comparable, divide its NOI by its sale price, then judge whether its rate fits the subject.
- Topic
- Cap-rate behavior
- What to know
- Risk, required return, income stability, rent growth, expense growth, vacancy, tenant credit, lease term, condition, capital need, liquidity, interest rates, supply, demand, higher rate, lower value, and inverse relationship
- Best exam move
- With NOI fixed, rate and value move in opposite directions.
- Topic
- GRM definition
- What to know
- Gross rent multiplier, sale price, monthly gross rent, annual gross rent, price-to-rent relationship, whole number, decimal multiplier, market extraction, quick estimate, comparable property, and no explicit expense deduction
- Best exam move
- Read GRM as how many units of gross rent the market price represents.
- Topic
- GRM formulas
- What to know
- GRM = sale price divided by rent, value = rent times GRM, rent = value divided by GRM, monthly multiplier, annual multiplier, same period, subject application, comparable extraction, rounding, and unit label
- Best exam move
- Divide comparable price by comparable rent, then multiply subject rent by the selected GRM.
- Topic
- Gross-rent input
- What to know
- Scheduled rent, potential gross rent, contract rent, market rent, monthly rent, annual rent, unit rent, total property rent, concessions, vacancy, other income, effective gross income, and stated definition
- Best exam move
- Use the same gross-rent definition for the comparable and subject, and do not silently switch to EGI or NOI.
- Topic
- GRM extraction
- What to know
- Comparable sale price, comparable rent, verified lease, unit mix, rent period, property type, condition, vacancy, expense ratio, location, sale date, arms-length sale, outlier, range, median, and reconciliation
- Best exam move
- Derive each comparable's multiplier and select support based on similarity rather than averaging blindly.
- Topic
- Expense treatment
- What to know
- Operating expense, expense ratio, property tax, insurance, management, utilities, repairs, maintenance, owner-paid service, capital need, comparable expense similarity, NOI deduction, GRM limitation, and hidden difference
- Best exam move
- Cap rate reflects expenses through NOI; GRM can overvalue a property whose expense burden exceeds its comparables.
- Topic
- Monthly and annual consistency
- What to know
- 12 months, monthly rent, annual rent, annual NOI, annual cap rate, monthly GRM, annual GRM, unit conversion, comma, percentage, multiplier label, period mismatch, and order of operations
- Best exam move
- Match periods before calculating and label the result as a rate, multiplier, income, or value.
- Topic
- Cap rate versus interest rate
- What to know
- Property return, mortgage rate, lender, borrower, loan balance, annual interest, debt service, leverage, weighted capital, mortgage constant, equity rate, market conditions, and no direct substitution
- Best exam move
- A loan quote cannot replace an overall cap rate merely because both are percentages.
- Topic
- Cap rate versus equity returns
- What to know
- Cash-on-cash return, equity dividend rate, before-tax cash flow, equity invested, levered return, internal rate of return, discount rate, yield capitalization, appreciation, principal reduction, and total return
- Best exam move
- Cap rate is a property-level one-year relationship, not the investor's full levered return.
- Topic
- Method selection
- What to know
- Available data, small rental, apartment, commercial property, reliable expenses, comparable rent, comparable NOI, similarity, direct capitalization, gross multiplier, sales comparison, cost approach, support, secondary check, and reconciliation
- Best exam move
- Choose the method whose input is actually supported instead of forcing every property through one formula.
- Topic
- Sensitivity and reasonableness
- What to know
- NOI change, cap-rate change, rent change, GRM change, value effect, basis point, percentage point, outlier, range, expense shock, vacancy shock, capital need, scenario, cross-check, and market evidence
- Best exam move
- Test whether a small input change creates a plausible value and identify which assumption drives the answer.
- Topic
- Exam quality control
- What to know
- Formula selection, income label, decimal conversion, monthly conversion, annual conversion, expenses, debt service, multiplication, division, rate sign, multiplier label, rounding, units, answer estimate, and inverse relationship
- Best exam move
- Estimate direction first: dividing NOI by a single-digit percentage should produce a value much larger than NOI.
How do you make the distinction stick?
- Session
- Session 1
- Focus
- Memorize both formula families
- Proof you are ready
- Write the three cap-rate formulas and three GRM formulas from memory, including labels and units.
- Session
- Session 2
- Focus
- Classify the income input
- Proof you are ready
- Sort 30 PGI, EGI, NOI, monthly rent, annual rent, debt-service, and cash-flow figures into cap-rate, GRM, or neither.
- Session
- Session 3
- Focus
- Extract market rates and multipliers
- Proof you are ready
- Derive cap rates and monthly or annual GRMs from 15 comparable sales and reject inconsistent inputs.
- Session
- Session 4
- Focus
- Calculate value
- Proof you are ready
- Solve 15 NOI-divided-by-rate and rent-times-GRM problems with decimal, percentage, and period checks.
- Session
- Session 5
- Focus
- Explain limitations
- Proof you are ready
- Identify expense, vacancy, condition, lease, capital, timing, financing, and comparability risks in ten value indications.
- Session
- Session 6
- Focus
- Complete a mixed income-method set
- Proof you are ready
- Score at least 90% and justify each answer by method, income level, formula, period, decimal conversion, direction, and reasonableness.
Do not count recognition as mastery. Close the notes and explain the rule, apply it to a new fact pattern, and identify why each distractor fails.
Turn the comparison into a test-day decision
From concept to decision
Drill this topic, then review the explanation
Pass Illinois gives you original national and Illinois questions, topic-by-topic study, clear explanations, timed practice, flashcards, progress tracking, and Math Coach. Start free, find the weak distinction, and focus the next session there.
Questions students ask about Cap Rate vs. GRM
What is a capitalization rate?
An overall capitalization rate is the relationship between one year's net operating income and property value or sale price. The core formulas are R = I divided by V, V = I divided by R, and I = V times R. Express the rate as a decimal in the calculation and as a percentage in the answer.
What is a gross rent multiplier?
A gross rent multiplier, or GRM, is sale price divided by gross rent for the same period. Once a market-supported GRM is selected, indicated value equals subject gross rent times GRM. A GRM is a multiplier, not a percentage.
What is the main difference between cap rate and GRM?
A cap rate uses net operating income after operating expenses. A GRM uses gross rent before operating expenses. Cap rate explicitly reflects the selected expense estimate through NOI, while GRM assumes comparable properties have sufficiently similar expense and income relationships.
Which income belongs in a cap-rate formula?
Use annual net operating income that is consistent with the capitalization rate. Do not substitute gross rent, cash flow after debt service, taxable income, or monthly income into an annual cap-rate formula unless the problem directs and the measures are converted consistently.
Which income belongs in a GRM formula?
Use the gross rent definition and period used to derive the comparable multiplier. A monthly GRM uses monthly gross rent for both comparable and subject. An annual GRM uses annual gross rent for both. Do not mix potential gross rent, effective gross income, and NOI casually.
Does a higher cap rate mean a higher value?
Not when NOI stays fixed. Value equals NOI divided by cap rate, so a higher cap rate produces a lower indicated value. A higher required return often reflects greater perceived risk, weaker growth expectations, or other market concerns, all else equal.
Does a higher GRM mean a higher value?
For the same subject gross rent, yes. Value equals rent times GRM, so a higher selected multiplier produces a higher indication. The multiplier must still come from comparable properties with consistent rent periods and reasonably similar income and expense characteristics.
Is cap rate the same as mortgage interest rate?
No. A cap rate relates property NOI to value. A mortgage interest rate prices borrowed money. Financing can affect investor cash flow and market expectations, but debt service is not deducted in the standard NOI used for an overall cap rate.
Is cap rate the same as cash-on-cash return?
No. Cap rate uses property NOI divided by total property value or price. Cash-on-cash return usually uses before-tax equity cash flow divided by cash equity invested, so it reflects financing and the investor's capital structure.
Are these official PSI Illinois real estate exam questions?
No. They are original questions aligned to the national Valuation and Real Estate Math outlines effective June 24, 2026. Current appraisal, banking, Illinois, and federal primary sources were reviewed through August 1, 2026.
Primary sources
- PSI Illinois Candidate Information Booklet dated June 24, 2026
- Illinois Department of Financial and Professional Regulation, real estate appraisal
- The Appraisal Foundation, current Uniform Standards of Professional Appraisal Practice
- U.S. Department of Justice, Uniform Appraisal Standards for Federal Land Acquisitions
- Office of the Comptroller of the Currency, Commercial Real Estate Lending handbook
- U.S. Securities and Exchange Commission, current real estate investment trust overview
The current official outline controls the tested scope. Statutes, regulations, and official agency materials control when a general study rule and a jurisdiction-specific rule differ.
Editorial status
Checked against primary sources
The Pass Illinois editorial team last checked this guide on August 1, 2026. Every practice question is an original study item, and the source links above let you verify the rules that support the lesson.