Capitalization rate from annual NOI and market value

Short answer: Cap rate equals annual NOI divided by property value or price. Value equals annual NOI divided by the decimal cap rate. NOI equals value times the decimal cap rate. Build NOI as the problem directs, commonly potential gross income minus vacancy and collection loss, plus other property income, minus operating expenses. Standard exam NOI excludes mortgage debt service, accounting depreciation, owner income taxes, and usually capital expenditures. Cap rate is not a mortgage interest rate, GRM, cash-on-cash return, appreciation rate, or guaranteed investment yield. Use a market-supported rate on a stabilized, consistently defined NOI, preserve annual units, and report only the conclusion the facts support. One percentage point equals 100 basis points, so a move from 7.5% to 8.0% is 50 basis points, not a 0.5% relative change.

This guide teaches direct-capitalization arithmetic for exam use. Professional valuation requires appropriate stabilized income and expenses, market-supported capitalization-rate derivation, property-rights analysis, comparable evidence, risk analysis, extraordinary assumptions where applicable, and reconciliation under current standards. Comparable extraction also requires verification of the sale price, transaction conditions, property interest, NOI period, vacancy treatment, expense treatment, reserves, and changes between the sale date and effective date. A mathematically exact extracted rate can still be a poor subject input when those foundations differ. Rates change across property types, locations, leases, market conditions, and dates. Never substitute a familiar cap rate for the one stated or supported by a problem. Sources were checked through August 1, 2026.

1. Circle the requested result: effective gross income, NOI, cap rate, value, or missing operating expense.
2. Annualize the income data and apply the vacancy or collection-loss instruction to the correct base.
3. Add stated other property income and subtract stated operating expenses to build annual NOI.
4. Remove debt service, depreciation, income tax, and capital items from standard NOI unless the question expressly includes them.
5. Write the three-part relationship: rate equals NOI divided by value, value equals NOI divided by rate, and NOI equals value times rate.
6. Convert every percentage to a decimal before multiplication or division and preserve precision through the final step.
7. Reverse-check the answer by placing it back into NOI divided by value.
8. State the calculation as an indicated rate, value, or income without declaring investment quality from the ratio alone.

These questions are original study items aligned to the published outline. They are not copied, recalled, or predicted PSI questions.

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.

• Study rate of return and capitalization
• Study the income approach to value
• Compare cap rate and GRM
• Practice randomized cap-rate math

• PSI Illinois Candidate Information Booklet dated June 24, 2026
• U.S. Department of Housing and Urban Development, income approach to value guidance
• Federal banking agencies, current valuation concepts for income-producing real estate
• Office of the Comptroller of the Currency, current commercial real estate resources
• Fannie Mae Selling Guide B4-1.3-10, current income approach guidance
• Fannie Mae Multifamily Guide, current capitalization-rate derivation guidance

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.