Income-method comparison
Cap rate vs GRM: start with the income line
The income label tells you which calculation to use. Annual net operating income and a supported cap rate call for division. Gross rent and a supported gross rent multiplier call for multiplication. Before you calculate, check what the income includes and the period it covers.
Last reviewed:
The short answer
Cap rate = annual NOI ÷ price or value. Direct-capitalization value = annual NOI ÷ cap rate. GRM = sale price ÷ gross rent for the stated period; indicated value = matching subject rent × selected GRM. Cap rate uses net operating income, while GRM uses gross rent without explicitly subtracting operating expenses. Enter 8% as 0.08, but use a multiplier of 120 as 120. Match income definitions, periods and reserve conventions before comparing results.
Reviewed October 26, 2026. PSI places the income approach at National III.B.4 and rate of return/capitalization rate at XI.B.2. The whole national Valuation domain has 8 of the 100 scored broker questions; the whole Calculations domain has 7. These are not quotas for this page. The questions and hypothetical rates are original teaching examples, not PSI items, current Illinois investment benchmarks or completed appraisal or lending decisions.
Choose the income, formula and units in that order
- Write the income label first. For the overall cap-rate calculation here, use annual NOI consistent with the selected rate. For GRM, identify gross rent, its period and whether the problem specifies market, contract, potential or collected rent. Those descriptions are not interchangeable. Use comparable and subject figures on the same supported basis.
- Build NOI only when needed. Apply the stated vacancy and collection-loss allowance to its specified base, add the stated other income and subtract the defined property operating expenses. Keep mortgage principal and interest, owner income tax and accounting depreciation out of this property-level NOI. Read the reserve convention carefully; do not deduct a supplied expense or reserve twice.
- Use the cap-rate family: rate = NOI ÷ value; value = NOI ÷ rate; NOI = value × rate. Convert a percentage to its decimal for arithmetic. When deriving a market rate, use the comparable’s matching annual income and verified price, then assess whether its rights, timing and other characteristics support applying it to the subject.
- Use the GRM family: multiplier = comparable price ÷ comparable gross rent; subject indication = matching subject rent × selected multiplier; rent = indication ÷ multiplier. A GRM is a multiple, not a percentage. Gross income including other revenue and effective income after vacancy can require differently defined multipliers; do not silently substitute them for rental income.
- Match the period. A monthly-rent multiplier applies to monthly rent. An annual-rent multiplier applies to annual rent. For the same price and rent stream with annual rent exactly twelve times monthly rent, the monthly multiplier is twelve times the annual multiplier. Converting both sides preserves the indication; changing only one creates a factor-of-twelve error.
- Check what expenses the gross method hides. Similar gross rent does not establish similar NOI, owner-paid utilities, vacancy, condition or replacement needs. A GRM may be a useful market comparison, but it does not explicitly subtract those costs. A direct-capitalization calculation can reflect supported operating differences through its matching NOI without making every other comparable difference irrelevant.
- Keep the measures separate. A cap rate uses NOI and total property value or price. A mortgage rate applies to borrowing. A defined cash-on-cash measure uses the exercise’s before-tax equity cash flow and cash invested. None automatically equals a multi-year total return or the discount rate for a changing future income stream.
- Check direction, support and rounding. With positive NOI fixed, a larger positive cap rate gives a smaller indication; with positive rent fixed, a larger multiplier gives a larger indication. Keep precision through intermediate steps and round as instructed. The supported effective date, rights, income forecast and market evidence still matter. A formula answer is one indication, not a guaranteed sale price, loan approval or final professional appraisal.
| Question | Cap-rate method | Gross-rent method |
|---|---|---|
| Income input | Matching annual NOI | Gross rent on the stated consistent basis |
| Extract from a sale | NOI ÷ price = rate | Price ÷ rent = multiplier |
| Apply to the subject | NOI ÷ selected rate = indication | Rent × selected multiplier = indication |
| Solve for income | Value × rate = NOI | Indication ÷ multiplier = rent |
| Number format | 8% becomes 0.08 | 120 stays 120 |
| Operating expenses | Reflected in the defined NOI | Not explicitly subtracted in the multiplication |
| Period | Annual income with the annual overall rate | Monthly or annual rent, with the matching multiplier |
| Holding positive income fixed | Higher rate gives lower value | Higher multiplier gives higher value |
| Main consistency check | Income and rate use the same expense/reserve basis | Rent definition, period and comparable economics match |
| What it does not show alone | Full equity return or loan eligibility | Net profitability or expense-adjusted value |
The distinctions that matter
| Distinction | How it works | What to notice |
|---|---|---|
| Net-income rate and gross-rent multiplier | The cap rate relates annual NOI to price or value. GRM relates price to rent for its stated period. | They use different income levels and opposite formula arrangements. |
| NOI and equity cash flow | NOI is the property-level measure before debt service. A specified equity cash flow can reflect financing and other stated cash adjustments. | Do not deduct the mortgage twice or call cap rate the owner’s spendable return. |
| Gross rent and all gross income | Rent-only evidence and income including other revenue are different bases. Potential and effective income also differ. | Read GRM, GIM or effective-income labels and definitions. |
| Monthly and annual multiplier | For the same twelve-month rent stream, monthly GRM is twelve times the annual rent multiple. | 120 monthly and 10 annual can describe the same price. |
| Current receipts and supported income | Actual records are evidence, but they need not equal the appropriate stabilized or market forecast. | Do not capitalize temporary loss or stale rent as a supported stable stream by assumption. |
| Mortgage interest and overall cap rate | One prices borrowed funds; the other relates property NOI and total price or value. | Two percentages are not permission to swap them. |
| Cap rate and multi-year yield | Direct capitalization uses the selected one-year income relationship. A multi-year discounted cash-flow analysis has its own timing and assumptions. | No automatic equality with IRR or discount rate. |
| Rate change and value change | The percentage-point change in a rate differs from its relative percentage change and the inverse change in value. | Say what quantity the percentage describes. |
| One indication and a final conclusion | An indication relies on its supplied assumptions. Reconciliation evaluates relevance, data quality and other evidence. | Do not select the highest number or average blindly. |
Work through the facts
Extract the comparable’s cap rate
A comparable sold for $1,500,000. Its matching stabilized annual NOI is $120,000. Assume the stated price and income are verified and appropriate for this extraction.
- Rate = $120,000 ÷ $1,500,000 = 0.08.
- Express the result as a percentage: 8%.
Answer: The extracted rate is 8%. Its suitability for another property still needs comparable analysis.
Use a supported rate and round at the end
The subject’s matching annual NOI is $135,000. The exercise supplies a supported 8.5% overall rate and asks for the nearest whole dollar.
- 8.5% = 0.085.
- $135,000 ÷ 0.085 = $1,588,235.294... before rounding.
Answer: The indicated value is $1,588,235 to the requested nearest dollar. This teaching precision does not imply that market evidence supports an actual appraisal to that dollar.
Extract and apply a monthly GRM
A verified comparable sold for $360,000 and has potential monthly market rent of $3,000. The exercise supports applying its multiplier to a sufficiently comparable subject with $3,250 of rent on the same basis.
- Monthly GRM = $360,000 ÷ $3,000 = 120.
- Subject indication = $3,250 × 120 = $390,000.
Answer: The monthly-GRM indication is $390,000. The multiplier is 120, not 120%.
Convert both rent and multiplier
Use that same $360,000 comparable and $3,000 monthly rent. The subject’s matching rent is $3,250 monthly, and each annual figure is exactly twelve times the monthly amount.
- Comparable annual rent = $36,000; annual rent multiple = $360,000 ÷ $36,000 = 10.
- Subject annual rent = $39,000; $39,000 × 10 = $390,000.
Answer: Both consistent methods indicate $390,000. Monthly multiplier 120 = 12 × annual multiplier 10; do not apply 10 to monthly rent or 120 to annual rent.
Same gross rent, different operating costs
Two properties each have $120,000 of annual gross rent, with full collection and no other income. Defined annual operating costs are $40,000 for A and $60,000 for B. For this comparison, the same supported 8% rate is supplied on a matching basis and all other relevant differences are ruled out.
- A NOI = $80,000; $80,000 ÷ 0.08 = $1,000,000.
- B NOI = $60,000; $60,000 ÷ 0.08 = $750,000.
Answer: The supplied net-income analysis indicates different values despite equal gross rent. A single unadjusted gross multiplier would hide this expense difference; this is not a universal rule that all actual buildings share one rate.
Catch the percentage conversion error
Annual NOI is $80,000 and the exercise supplies an 8% overall rate. A student divides by 8.
- Eight percent is 0.08.
- $80,000 ÷ 0.08 = $1,000,000; dividing by 8 instead gives $10,000.
Answer: Use $1,000,000. The erroneous $10,000 is only one hundredth of the correct result.
Keep the loan quote out of the divisor
The property’s matching annual NOI is $155,000 and its supported overall rate is 7.75%. A lender separately quotes a 6.5% mortgage rate.
- Use the property rate, 0.0775.
- $155,000 ÷ 0.0775 = $2,000,000.
Answer: The indication is $2,000,000. The mortgage quote is not the supplied market cap rate.
Build the supplied NOI without deducting debt service
Annual potential rent is $144,000. Deduct vacancy and collection loss of 5% of that rent, then add $6,000 other income. Defined annual operating expenses of $42,000 already include all required reserve and property-tax allowances for this exercise. Debt service is $60,000. A matching 8% rate is supplied.
- Loss = $7,200; effective income = $144,000 − $7,200 + $6,000 = $142,800.
- NOI = $142,800 − $42,000 = $100,800; do not subtract the $60,000 debt service or reserves already included.
- $100,800 ÷ 0.08 = $1,260,000.
Answer: The exercise indicates $1,260,000. Its NOI is not a tax-return profit or a guarantee of the owner’s available cash.
A one-point rate change is not a one-percent value change
Hold matching annual NOI at $120,000. Compare an 8% rate with 9%, with every other assumption unchanged. Round final indicated values to the nearest dollar.
- At 8%: $120,000 ÷ 0.08 = $1,500,000.
- At 9%: $120,000 ÷ 0.09 = $1,333,333.333...
- The rate rises one percentage point, or 100 basis points; indicated value falls about 11.11% from $1,500,000.
Answer: The new indication is $1,333,333. The inverse change is not a 1% value decrease, and these are hypothetical rates rather than current market benchmarks.
Cap rate and a defined equity return
The exercise supplies $100,800 annual NOI and a $1,260,000 property price. Separately, it defines before-tax equity cash flow after debt service and all stated cash adjustments as $40,800, and total cash equity invested as $400,000.
- Cap rate = $100,800 ÷ $1,260,000 = 8%.
- The exercise’s cash-on-cash return = $40,800 ÷ $400,000 = 10.2%.
Answer: The measures are 8% and 10.2%, with different numerators and denominators. The defined equity measure is not a full after-tax or multi-year return.
The reciprocal is gross yield, not cap rate
For the same property, annual gross rent is $120,000, annual NOI is $72,000 on the stated expense basis, and price is $900,000. There is no other income. The monthly rent is exactly one-twelfth the annual rent.
- Annual rent multiple = $900,000 ÷ $120,000 = 7.5; its reciprocal is $120,000 ÷ $900,000 = 13.333...%, a gross-rent yield.
- Cap rate = $72,000 ÷ $900,000 = 8%. The NOI-to-gross-rent ratio is 60%, so 0.60 ÷ 7.5 = 0.08.
- Monthly GRM is $900,000 ÷ $10,000 = 90; using that monthly multiple requires annualization: 0.60 × 12 ÷ 90 = 0.08.
Answer: The cap rate is 8%, not 13.33%. A reciprocal only inverts its actual numerator and denominator; it does not make gross rent become NOI.
Match the reserve basis on both sides
A verified comparable price is $1,200,000. Its annual income is $90,000 before a $6,000 replacement-reserve allowance and $84,000 after it. For this exercise, both matching rates are otherwise supported for the subject. Subject income is $112,500 before a $7,500 allowance and $105,000 after it, with no other adjustments.
- Before-reserve extraction: $90,000 ÷ $1,200,000 = 7.5%. After-reserve extraction: $84,000 ÷ $1,200,000 = 7%.
- Consistent before-reserve indication: $112,500 ÷ 0.075 = $1,500,000. Consistent after-reserve indication: $105,000 ÷ 0.07 = $1,500,000.
- Mixing after-reserve subject income with the before-reserve rate gives $105,000 ÷ 0.075 = $1,400,000, which is not the matching calculation.
Answer: Both expressly supported matching conventions indicate $1,500,000 here. The error is mixing them or deducting the reserve twice, not assuming one convention applies to every source or program.
Mistakes to avoid
- Cap rate and GRM use the same income. Cap rate here uses matching annual NOI; GRM uses gross rent on its stated basis.
- Eight percent is entered as 8. Use 0.08 in the ordinary multiplication or division.
- Monthly rent can use any annual multiplier unchanged. Match the rent period and multiplier; convert both sides consistently.
- Gross rent means collected income after every deduction. Potential, contract, market, collected, effective and net income have different meanings.
- Every reserve is always above NOI or always below it. Use the supplied or program-specific convention consistently and avoid double counting.
- A higher cap rate always means a better investment. At fixed positive NOI it lowers the formula indication; risk, financing, capital needs and other facts still matter.
- A multiplier is a percentage or a net payback period. It is a price-to-rent relationship; expenses and other cash events prevent that shortcut.
- The mortgage rate is a convenient substitute. It prices debt and is not automatically the property’s supported overall cap rate.
- A formula makes the figure a completed appraisal. The indication still depends on appropriate authority, evidence, method and assumptions.
Check your understanding
These are original teaching questions, not recalled or predicted PSI questions. Answer first, then explain why the other choices fail.
1. A verified sale price is $1,000,000 and matching annual NOI is $75,000. What overall rate is extracted?
- 75%
- 13.33%
- 0.75%
- 7.5%
Show answer and explanation
Answer: D. 7.5%
$75,000 ÷ $1,000,000 = 0.075 = 7.5%. Suitability for the subject requires additional comparable analysis.
2. A comparable sold for $480,000 with $4,000 potential monthly market rent. What is its monthly GRM?
- 1.20
- 120
- 12
- 0.008333
Show answer and explanation
Answer: B. 120
$480,000 ÷ $4,000 = 120. This is a monthly-rent multiplier, not 120%.
3. The subject’s matching annual NOI is $96,000 and the supported overall rate is 8%. What is the indication?
- $1,200,000
- $768,000
- $12,000
- $120,000
Show answer and explanation
Answer: A. $1,200,000
$96,000 ÷ 0.08 = $1,200,000. Do not divide by 8 or substitute gross rent.
4. Annual potential rent is $144,000, loss is 5% of that rent, other income is $6,000 and defined operating expenses are $42,000 including all required reserves. What is NOI before a separate $60,000 debt service?
- $100,800
- $102,000
- $142,800
- $40,800
Show answer and explanation
Answer: A. $100,800
$144,000 − $7,200 + $6,000 − $42,000 = $100,800. The separate debt service does not reduce this property-level NOI; already included reserves are not deducted again.
5. At the same price and rent stream, annual rent is exactly twelve times monthly rent. How does monthly GRM relate to the annual rent multiple?
- Monthly GRM is one-twelfth the annual multiple
- Monthly GRM is twelve times the annual multiple
- They are always numerically identical
- There is no relationship even on these facts
Show answer and explanation
Answer: B. Monthly GRM is twelve times the annual multiple
The same price is divided by a denominator twelve times as large for the annual multiple, so that multiple is one-twelfth the monthly one. Apply each to its matching rent period.
6. A subject’s matching annual gross rent is $39,000 and the supported annual rent multiple is 10. What is the indication?
- $3,900
- $390,000
- $39,000
- $3,900,000
Show answer and explanation
Answer: B. $390,000
$39,000 × 10 = $390,000. Use an annual rent multiple with annual rent, not monthly rent or a percentage interpretation.
7. With positive annual NOI unchanged, what happens when the selected positive cap rate increases?
- Value stays fixed
- NOI becomes gross rent
- Value rises by the same percentage
- The formula indication decreases
Show answer and explanation
Answer: D. The formula indication decreases
Value = NOI ÷ rate. A larger positive divisor gives a smaller result when the numerator is fixed.
8. With positive gross rent unchanged, what happens when the selected matching GRM increases?
- Expenses automatically disappear
- Value necessarily falls
- The formula indication increases
- The rate becomes the mortgage interest rate
Show answer and explanation
Answer: C. The formula indication increases
Indication = rent × multiplier. The direct mathematical relationship does not establish that the new multiplier is market-supported.
9. Which income input explicitly reflects the defined property operating expenses?
- A loan’s original principal
- A seller’s asking price
- NOI in the overall cap-rate calculation
- Gross rent before expense deductions
Show answer and explanation
Answer: C. NOI in the overall cap-rate calculation
The net-income method uses the appropriate income after defined property operating costs. The gross-rent multiplication does not explicitly subtract them.
10. Which item stays outside the property-level NOI used here?
- Defined management expense
- Property operating insurance
- Mortgage principal and interest debt service
- Defined property maintenance
Show answer and explanation
Answer: C. Mortgage principal and interest debt service
Financing payments are separate from property operating income. The reserve convention must still be read, and owner income taxes and accounting depreciation are not this NOI’s operating deductions.
11. Annual NOI is $155,000, the supported cap rate is 7.75%, and a mortgage quote is 6.5%. Which divisor belongs in the supplied direct-capitalization calculation?
- 7.75
- 0.0775
- 0.065
- 6.5
Show answer and explanation
Answer: B. 0.0775
Use the matching property rate of 0.0775; $155,000 ÷ 0.0775 = $2,000,000. The separate loan quote is not that rate.
12. An exercise defines before-tax equity cash flow as $40,800 after all stated adjustments and cash equity invested as $400,000. What is that defined cash-on-cash return?
- 102%
- 0.102%
- 8%
- 10.2%
Show answer and explanation
Answer: D. 10.2%
$40,800 ÷ $400,000 = 0.102 = 10.2%. This uses equity cash flow and cash invested rather than NOI and total property price; it is not a full multi-year or after-tax return.
13. Three extracted multipliers differ, and their properties have different condition and expense patterns. How should the subject multiplier be selected?
- Analyze comparable relevance and evidence rather than automatically averaging or choosing the highest
- Choose the one that reaches the desired loan amount
- Always average without reviewing differences
- Always choose the highest
Show answer and explanation
Answer: A. Analyze comparable relevance and evidence rather than automatically averaging or choosing the highest
Extraction supplies evidence, not a universal selection shortcut. Income basis, period, rights, condition, expenses and other relevant differences need analysis.
14. A measure adds substantial parking and laundry revenue to rent. What should be checked before applying a rent-only GRM?
- Whether the loan balance equals rent
- Nothing, every income label is identical
- Whether a gross-income or other consistently defined multiplier is required
- Whether the multiplier can be entered as a percent
Show answer and explanation
Answer: C. Whether a gross-income or other consistently defined multiplier is required
Gross income including other revenue is not automatically the same basis as gross rent. Identify what each multiplier’s numerator, denominator and period represent.
15. An exercise requests the nearest final dollar for $135,000 annual NOI divided by 8.5%. Which approach is appropriate?
- Round NOI to $100,000 first
- Use 0.085, retain intermediate precision and round the final result to $1,588,235
- Use 8.5 as the divisor
- Round 8.5% to 9% first
Show answer and explanation
Answer: B. Use 0.085, retain intermediate precision and round the final result to $1,588,235
The unrounded quotient is $1,588,235.294... . Rounding the supplied rate first changes the calculation. This teaching precision does not imply an actual market opinion is credible to one dollar.
16. What does a mechanically correct cap-rate or GRM result establish by itself?
- Guaranteed sale price
- A completed licensed appraisal regardless of context
- Automatic loan approval
- An indication conditional on its inputs and method
Show answer and explanation
Answer: D. An indication conditional on its inputs and method
The evidence, intended use, actual authority, property rights, assumptions and method still matter. A single formula is not a guarantee or permission to perform regulated appraisal work.
17. Annual gross rent is $120,000, annual NOI is $72,000 and price is $900,000 on consistent stated facts. What is the cap rate, rather than the reciprocal of the annual gross-rent multiple?
- 90%
- 7.5%
- 8%
- 13.33%
Show answer and explanation
Answer: C. 8%
$72,000 ÷ $900,000 = 0.08 = 8%. The annual gross-rent multiple is 7.5; its reciprocal is gross rent/price, or 13.333...%, not NOI/price.
18. The subject’s annual income after the stated replacement-reserve allowance is $105,000. The exercise supports a 7% rate extracted on that same after-reserve basis. What is the matching indication?
- $735,000
- $1,500,000
- $7,350,000
- $1,400,000
Show answer and explanation
Answer: B. $1,500,000
$105,000 ÷ 0.07 = $1,500,000. A 7.5% rate extracted before reserves is a different basis and cannot be silently substituted; the supplied reserve is not deducted again.
19. An overall rate increases from 8% to 9%. How many basis points is that increase?
- 12.5
- 1
- 1,000
- 100
Show answer and explanation
Answer: D. 100
One percentage point is 100 basis points. The relative rate increase is 12.5%, and the value change at fixed positive NOI is a different inverse calculation; those are not the number of basis points.
20. A property has a temporary operating loss, no supported stabilized income forecast and no market-supported rate or rent multiplier. What follows from these facts alone?
- More appropriate income, market evidence and method analysis are needed
- Its market value must be negative
- Its market value is automatically zero
- Any gross rent multiplied by 120 proves its value
Show answer and explanation
Answer: A. More appropriate income, market evidence and method analysis are needed
The facts do not supply a supported valuation basis. Do not turn a temporary loss into an automatic property-value conclusion or invent a universal multiplier. A mechanically possible operation does not establish a credible method.
Common questions
What is the main difference between cap rate and GRM?
Cap rate relates annual NOI to total price or value and is commonly stated as a percentage. GRM relates price to gross rent for the chosen period and is a multiplier. The net-income calculation reflects defined operating expenses through NOI; the gross-rent multiplication does not explicitly subtract them.
What are the three cap-rate formulas?
Rate = annual NOI ÷ value; value = annual NOI ÷ rate; annual NOI = value × rate. Enter a percentage as a decimal in the calculation: 8% becomes 0.08. The income and overall rate must use a matching basis. These are the formulas used for the supplied direct-capitalization exercises, not proof that an unsupported income or rate is appropriate.
What are the GRM formulas?
GRM = comparable sale price ÷ comparable gross rent for the stated period. Indicated value = matching subject rent × selected GRM. To solve for the stated rent, divide the indication by that multiplier. A multiplier of 120 stays 120; it is not 120% or a guaranteed net payback period.
Is GRM monthly or annual?
Check the definition. Monthly market-rent GRM is common, including in the identified IAAO glossary. The DRE educational reference also describes monthly and annual gross multipliers. If a problem defines an annual rent multiple, apply it to matching annual rent. For the same price and a twelve-month rent stream, monthly GRM is twelve times the annual multiple. Neither period can be silently swapped.
Do I use market rent or the rent actually collected?
Use the problem’s stated basis and the evidence appropriate to the assignment. Potential gross market rent, contract rent, collected receipts and effective income are different concepts. Comparable and subject inputs must be consistent; actual below-market contract rent is not automatically equivalent to supported market rent. Do not substitute collected income after vacancy for a potential-rent multiplier without analysis.
Does GRM use all income or only rent?
GRM focuses on gross rent. Gross income can also include parking, laundry and other revenue, and effective income reflects its specified adjustments. A GIM or effective-income multiplier can therefore use a different denominator. Read the definition rather than treating every gross or net label as interchangeable.
Does NOI deduct mortgage payments, income taxes or depreciation?
Not in the property-level NOI used here. Mortgage principal and interest, owner income taxes and accounting depreciation are separate from the defined property operating expenses. Real-property operating taxes and insurance are different from the owner’s income tax. Apply the actual expense convention and avoid double deductions; a tax-return result is not automatically the required appraisal or underwriting NOI.
Are replacement reserves above or below NOI?
Definitions vary. The identified OCC underwriting definition includes an imputed replacement reserve in operating expenses. The identified Fannie Mae multifamily definition instead obtains its net cash flow by deducting the full underwritten replacement reserve from NOI. Neither convention is permission to deduct the same allowance twice. Match the rate’s and subject’s income basis and follow the exercise or applicable program; do not assume every item called NOI is identical.
Why can the same gross rent produce different value indications?
Properties can have different operating expenses, vacancy, condition, lease terms or capital needs. A gross multiplier does not explicitly subtract those differences. The worked expense example supplies the same otherwise-appropriate cap rate solely to isolate the NOI effect. In actual analysis, the appropriate rate and other assumptions also need support.
Does a higher cap rate mean a higher value or a better deal?
Holding positive NOI fixed, a higher positive rate lowers the direct-capitalization indication. It is not a stand-alone investment recommendation. Different perceived risks, growth, property condition, capital needs, financing and market evidence can affect the comparison. This page’s rates are hypothetical and do not establish a good current Illinois cap rate.
Does a higher GRM mean a higher indication?
Holding positive rent fixed on the same basis and period, yes: rent times a larger multiplier is larger. That arithmetic does not establish that the multiplier is supported or that the property produces more NOI or a better net return. Expense and property differences still matter.
Is cap rate the mortgage interest rate or cash-on-cash return?
No. A mortgage rate prices debt. Cap rate uses property NOI and total price or value. A defined cash-on-cash return uses before-tax equity cash flow and cash invested, reflecting the stated financing and cash adjustments. The worked example gives 8% and 10.2% from different measures; neither is automatically a multi-year IRR or the correct discount rate.
Should I average the comparable rates or multipliers?
Do not assume an unweighted average is the answer. Review rights, timing, income and reserve conventions, rent levels, condition, expenses and other relevant similarities. A selected rate or multiplier needs support for the subject. A prescribed arithmetic exercise can tell you how to combine stated figures; that does not create a universal appraisal method.
When should I round, and are these PSI questions?
Keep intermediate precision and round at the point and to the unit the question specifies. These are original questions aligned to the public outline, not PSI items. The nearest-dollar examples teach arithmetic; they do not claim an actual property can be appraised with that precision or that a practice percentage validates exam readiness.
Is cap rate simply one divided by GRM?
No. For a consistent annual gross-rent multiple, its reciprocal is annual gross rent divided by price, a gross yield. Cap rate uses annual NOI divided by price. With the same annual rent basis, cap rate = (NOI ÷ annual gross rent) ÷ annual rent multiple. If using a monthly GRM with annual NOI, account for twelve months as shown in the worked example. Do not treat gross yield as net yield or combine inconsistent definitions.
Why does mixing reserve conventions change the answer?
The extracted rate reflects the income definition used in its numerator. Applying that rate to a subject income measured differently creates a mismatch. The reserve example supplies before-reserve and after-reserve income and otherwise-supported rates; both consistent calculations give $1,500,000, while a mixed calculation gives $1,400,000. This illustrates consistency, not proof that either reserve convention is universal or that actual market rates will always reconcile identically.
What is the difference between a percentage point and a basis point?
One basis point is 0.01 percentage point. A move from 8% to 9% is one percentage point, or 100 basis points; relative to the old 8% rate, it is a 12.5% rate increase. With NOI fixed, value changes inversely, so that example’s value declines about 11.11%. Identify whether the question asks about the rate level, rate change or value change.
What if the rent is zero or NOI is temporarily negative?
Price divided by zero gross rent is undefined, not a GRM of zero. A temporary loss, unsupported forecast or missing rate does not by itself establish that the real estate has zero or negative market value. Investigate the appropriate income expectation, property rights, condition, market evidence and method rather than forcing a formula. Positive-income illustrations on this page do not supply a complete approach for every unusual property.
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Official sources and scope
Reviewed October 26, 2026. The public PSI outline establishes exam scope. Identified appraisal, banking and technical sources support the mathematical distinctions, with their own definitions and purposes. Hypothetical figures are supplied for teaching; no current market rate, property valuation, loan approval or individual tax result is determined.
- PSI: income approach and capitalization calculations
- California DRE educational reference: income formulas and gross multipliers
- IAAO 2022 glossary: rent and income definitions
- OCC handbook: stabilized NOI, cap rates and defined expenses
- Fannie Mae multifamily: its reserve and net-cash-flow definition
- Investor.gov: basis points and percentage points
- 225 ILCS 458/5-5: appraisal authority and specified exceptions
This is exam preparation, not advice for a specific transaction. State law and the applicable facts control. Our editorial and corrections process explains how to report an issue.