Calculations topic guide
Rate of return and capitalization rate
A property can have a positive NOI while its owner has negative cash flow. That is not a contradiction: operating income and money left after loan payments answer different questions. Build the income statement first, then match the requested return to its income figure and investment base.
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The short answer
In these exercises, effective gross income is potential income less the stated vacancy and collection loss, plus other income not already included. NOI is effective income less the operating expenses defined for that model, before debt service, owner income tax and tax depreciation. Cap rate = annual NOI / property value; value = annual NOI / cap rate. Simplified before-tax cash flow = NOI - debt service, with any separately stated adjustments. Cash-on-cash return = annual before-tax cash flow / total stated cash invested. Multiply a decimal return by 100 to express a percentage.
The public PSI outline effective June 24, 2026 names rate of return and capitalization rate within the whole national broker Calculations category: 7%, or 7 of 100 scored questions. That is not a quota for each formula. These are original classroom exercises. Use the specified income period, expense convention and investment base. A calculation is not a complete appraisal, loan approval or recommendation to buy a property.
Build the income, then choose the denominator
- Name the result: potential income, effective income, NOI, indicated value, cash flow or a return percentage.
- Put recurring income and expenses on the same annual basis. A monthly amount needs conversion before comparison with an annual rate.
- Apply vacancy and collection loss to the exact stated base. If income is already effective or other revenue is already included, do not deduct or add it twice.
- Subtract the model's operating expenses. Distinguish routine operations, capital expenditure, replacement reserves, debt service and owner tax items.
- For cap rate, use annual NOI and the stated property value or price. For value, divide by the decimal cap rate; for required NOI, multiply value by that rate.
- For the simplified cash-flow task, subtract stated debt service and any separate adjustments once. Cash-on-cash uses the total cash investment defined by the task, not automatically only a down payment.
- Keep a multiplier's income basis and period consistent. A gross-rent multiplier does not directly subtract expenses and is not a cap-rate percentage.
- Carry precision, round as instructed and check direction. With fixed positive NOI and positive cap rates, raising the rate lowers indicated value. Division by zero does not produce a usable return or value.
| Requested measure | Stated calculation | Check first |
|---|---|---|
| Vacancy loss | Specified potential-income base x loss rate | Not the collected balance |
| Effective income | Potential base - stated losses + other income not already included | Do not double count |
| NOI | Effective income - model-defined operating expenses | Debt service, owner tax and tax depreciation are outside basic NOI |
| Cap rate as a percentage | Annual NOI / stated value x 100 | Not gross rent or after-debt cash flow |
| Direct-cap indication | Annual NOI / positive decimal cap rate | Compatible income and rate basis |
| Required NOI | Value x decimal cap rate | Not value divided by rate |
| Simplified before-tax cash flow | NOI - debt service - any separate stated adjustments | Deduct each amount once |
| Cash-on-cash percentage | Annual stated before-tax cash flow / total stated cash investment x 100 | Positive denominator; include all specified cash |
| Gross multiplier | Price / specified gross income | Monthly or annual; same income definition |
| Value from multiplier | Matching income x selected multiplier | Gross basis does not directly deduct operating expenses |
| Basis-point change | Percentage-point difference x 100 | Not the relative percent change |
| Zero denominator | No defined quotient in the stated formula | Do not claim infinite guaranteed return |
The distinctions that matter
| Distinction | How it works | What to notice |
|---|---|---|
| Potential income and effective income | Potential income describes the stipulated full earning base. Effective income allows for the specified vacancy and collection loss and applicable other income. | Vacancy dollars = the stated base x the loss rate. Other income already in the base is not added again. |
| Effective income and NOI | Effective income is before the defined operating expenses; NOI is after them. Annual property tax and owner income tax belong to different categories. | Property tax can be an operating expense. Owner income tax and tax depreciation are outside the basic cap-rate NOI. |
| Operating expense and debt service | Operations support the property. Debt service pays a particular financing arrangement and includes its specified principal and interest. | Do not subtract mortgage payments before the basic cap-rate NOI or count them twice when moving to cash flow. |
| An actual operating statement and stabilized NOI | A market-supported stabilized analysis can use vacancy and expense assumptions that differ from this year's actual collections or owner payments. | An unpaid manager or an unusually full building does not automatically justify zero management expense or zero stabilized vacancy. |
| Replacement reserves under different definitions | OCC's cited underwriting NOI includes an imputed replacement reserve whether funded or not. The identified Fannie Mae multifamily definition instead deducts the full underwritten replacement reserve from NOI to reach NCF. | Follow the named model. If its supplied NOI already includes the reserve deduction, do not subtract that reserve again. |
| A capital expenditure and a replacement allowance | Buying a long-lived replacement is different from a model's annual replacement allowance. An excluded full capital purchase does not mean every reserve must also be excluded. | Use the defined income measure and avoid counting the same capital cost or allowance twice. |
| NOI and simplified before-tax cash flow | NOI is before debt service. The simplified cash-flow exercise subtracts that debt service and any separately stated adjustments. | Positive NOI can coexist with negative cash flow if the specified debt service is larger. |
| Cap rate and cash-on-cash return | Cap rate uses NOI over property value or price. Cash-on-cash uses the stated before-tax cash flow over cash invested. Financing can change the latter without changing the property's assumed NOI. | The rates need not match, but they can coincide under particular assumptions; an all-cash example still needs consistent bases and costs. |
| Cash invested and only the down payment | The task's total cash investment can include closing costs and initial unfinanced improvements as well as the down payment. | Do not substitute current equity, the loan amount or only part of the stated investment. |
| Cap rate, discount rate and total return | A cap rate converts a stated single-year income measure to value. Discounted cash-flow analysis discounts expected future benefits, including the specified net sale reversion. | Cash-on-cash alone does not measure appreciation, principal paydown, sale proceeds or the time value of the full investment. |
| A percentage point and a relative percentage change | A move from 6% to 8% is 2 percentage points, or 200 basis points. Its relative rate increase is one third. | With fixed $60,000 positive NOI, value falls from $1,000,000 to $750,000, a 25% decline, not a 2% decline. |
| Cap rate and a gross-income multiplier | Cap rate uses NOI. A gross-rent or gross-income multiplier uses its specified gross income base and can be monthly or annual if consistently defined. | Price / monthly rent and price / annual rent yield different multipliers. Neither is automatically the reciprocal of the net-income cap rate. |
| A formula result and a complete appraisal | Market-supported income, rate evidence, comparable characteristics and the applicable appraisal requirements matter. Fannie Mae's cited rules do not accept sole reliance on the income approach for the covered appraisal. | The named Fannie Mae rules and applicable UAD 3.6 supplement are program-specific, not every Illinois property's universal method. |
| A higher rate and a better investment | A high indicated cap rate can accompany different risks, condition, income assumptions and capital needs. A percentage alone does not establish a bargain. | No universal good cap rate, guaranteed total return or loan-approval threshold is supplied by these examples. |
Work through the facts
Build NOI from the income ladder
An eight-unit property rents for $1,500 per unit each month. Vacancy and collection loss are 5% of scheduled rent, other annual income is $8,400, and annual operating expenses are $46,000.
- Potential rent is 8 x $1,500 x 12 = $144,000. Vacancy loss is $144,000 x 0.05 = $7,200.
- EGI is $144,000 - $7,200 + $8,400 = $145,200. NOI is $145,200 - $46,000 = $99,200.
Answer: Annual NOI is $99,200. No mortgage payment is subtracted because the question asks for NOI.
Estimate value with direct capitalization
A comparable-supported cap rate is 8%. The subject property's stabilized annual NOI is $104,000.
- Convert 8% to 0.08.
- Value = NOI / cap rate = $104,000 / 0.08.
Answer: The direct-capitalization indication is $1,300,000. Multiplying NOI by 8% would produce the wrong direction.
Solve for the cap rate
A property sells for $960,000 and has stabilized annual NOI of $67,200.
- Cap rate = NOI / value.
- $67,200 / $960,000 = 0.07.
Answer: The indicated cap rate is 7%. This is not automatically the buyer's cash-on-cash return.
Calculate cash-on-cash return
A buyer invests $250,000 cash. The property produces $78,000 NOI and has $53,000 in annual debt service. No other cash-flow adjustment is stated.
- Before-tax cash flow is $78,000 - $53,000 = $25,000.
- Cash-on-cash return is $25,000 / $250,000 = 0.10.
Answer: The cash-on-cash return is 10%. Dividing the $78,000 NOI by cash invested would mix an unlevered numerator with a leveraged denominator.
Deduct a replacement reserve once under the named model
A classroom statement has $120,000 effective income, $40,000 other operating expenses and a $5,000 full annual replacement reserve. For the OCC-style definition, the reserve belongs inside NOI. Annual debt service is $50,000; no other cash adjustment is requested.
- OCC-style NOI is $120,000 - $40,000 - $5,000 = $75,000.
- The simplified amount after the specified debt service is $75,000 - $50,000 = $25,000. Do not deduct the same reserve again.
- Under the separate Fannie Mae glossary convention, the corresponding pre-reserve NOI would be $80,000 and NCF after the $5,000 reserve would be $75,000, before this debt service. These labels are not interchangeable.
Answer: The stated OCC-style NOI is $75,000 and the simplified after-debt amount is $25,000; the reserve is deducted once.
Positive NOI can still leave negative cash flow
Stated annual NOI is $60,000, property value is $750,000, total cash invested is $300,000 and annual debt service is $75,000. Use the simplified before-tax cash-flow definition and assume no other adjustment.
- The property cap rate is $60,000 / $750,000 = 8%.
- Before-tax cash flow is $60,000 - $75,000 = -$15,000.
- Cash-on-cash return is -$15,000 / $300,000 = -5%. The negative result is not replaced with zero or changed to positive.
Answer: The stated cap rate is 8%, while the simplified cash-on-cash return is negative 5%.
Keep gross-rent periods separate from net income
A property price is $1,200,000. Stated gross rent is $10,000 monthly, constant for 12 months, with no vacancy or other income. Annual operating expenses under the stated model total $42,000.
- Annual gross rent is $120,000. The monthly gross-rent multiplier is 120; the annual one is 10.
- Both matching products indicate $1,200,000: $10,000 x 120 or $120,000 x 10.
- NOI is $120,000 - $42,000 = $78,000, giving a 6.5% cap rate. The reciprocal of the annual gross multiplier is a 10% gross yield, not this net cap rate.
Answer: Use 120 with monthly rent or 10 with annual rent. The stated net-income cap rate is 6.5%.
Separate the rate change from the value change
Hold positive annual NOI fixed at $60,000. Compare direct-capitalization indications at positive cap rates of 6% and 8%, with no other change.
- At 6%, value is $60,000 / 0.06 = $1,000,000. At 8%, value is $60,000 / 0.08 = $750,000.
- The rate increased by 2 percentage points, or 200 basis points; the relative rate increase is 2/6, or about 33.33%.
- The indicated value fell $250,000 from its $1,000,000 starting point, or 25%. This holds NOI fixed; it is not a forecast that a particular interest-rate move will cause that result.
Answer: The stated rate change is 200 basis points and the indicated value decline is 25%.
Include all of the stated cash investment
Annual before-tax cash flow is supplied as $25,000. For this exercise, total initial cash investment consists of $180,000 down payment, $20,000 closing costs and $50,000 initial unfinanced improvements, with no overlap or other adjustment.
- The specified investment is $180,000 + $20,000 + $50,000 = $250,000.
- $25,000 / $250,000 = 10%.
- Dividing only by $180,000 would give about 13.89% and omit $70,000 of the defined base. This is a stated-period cash-yield calculation, not total return or an actual investment recommendation.
Answer: The stated cash-on-cash return is 10%, using all $250,000 once.
Four ratios from the same stated property
Annual NOI is $90,000, property value is $1,200,000, the stated loan amount is $900,000, annual debt service is $72,000 and total stated cash invested is $300,000. Use the defined NOI-based DSCR and simplified before-tax cash-flow convention, with no other adjustment.
- Cap rate: $90,000 / $1,200,000 = 7.5%. Debt yield: $90,000 / $900,000 = 10%.
- NOI-based DSCR: $90,000 / $72,000 = 1.25 times.
- Before-tax cash flow is $18,000, so cash-on-cash return is $18,000 / $300,000 = 6%.
- The denominators serve different purposes. No universal lending threshold, approved loan, current market quote or investment decision follows from these ratios alone.
Answer: The stated results are 7.5% cap rate, 10% debt yield, 1.25 times DSCR and 6% cash-on-cash return.
Mistakes to avoid
- Adding other income that is already included Read how the stated potential or effective income is defined.
- Applying a vacancy rate to the wrong base Use rent only or all income exactly as stipulated.
- Deducting vacancy from income already described as effective Do not deduct the same loss twice.
- Subtracting debt service as a basic operating expense Keep the property measure separate from the financing cash flow.
- Using the same reserve treatment in every definition Follow the named NOI or NCF convention and count its deduction once.
- Equating appraisal NOI with taxable rental profit Tax reporting has its own recognition and deduction rules.
- Multiplying NOI by the rate to find value Divide by the positive decimal cap rate; multiplication solves for required NOI.
- Using monthly NOI with an annual rate Convert to the same period.
- Assuming a higher cap rate always means a better purchase Compare the supported income basis, capital needs and risks.
- Treating percentage points as the relative percentage change A 6% to 8% move is 200 basis points; fixed-NOI value changes by a different percentage.
- Using only down payment when total cash investment is supplied Include the specified closing costs and initial cash outlays once.
- Treating gross multipliers as cap-rate percentages Match the gross basis and period rather than taking a blind reciprocal.
- Treating positive NOI as guaranteed positive investor cash flow Debt service and other stated cash adjustments can exceed NOI.
- Treating practice accuracy as a measured pass probability No validated readiness cutoff is established for this original set.
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 property has $180,000 potential gross income, 6% vacancy and collection loss, $9,000 other income, and $58,000 operating expenses. What is NOI?
- $111,200
- $131,000
- $120,200
- $122,000
Show answer and explanation
Answer: C. $120,200
Use the stated $180,000 potential base for the 6% vacancy and collection loss: $10,800. Add the separately supplied $9,000 other income once: EGI is $178,200. Subtract $58,000 operating expenses to get $120,200 NOI. A differently defined income base would require its own instructions.
2. A property has annual NOI of $84,000 and sells for $1,200,000. What is the capitalization rate?
- 14.29%
- 6%
- 7%
- 8.4%
Show answer and explanation
Answer: C. 7%
$84,000 / $1,200,000 = 0.07, or 7%.
3. Stabilized annual NOI is $96,000 and the market cap rate is 7.5%. What is the indicated value?
- $1,371,429
- $1,280,000
- $720,000
- $1,200,000
Show answer and explanation
Answer: B. $1,280,000
$96,000 / 0.075 = $1,280,000.
4. Which expense is normally excluded from basic NOI used in direct capitalization?
- Owner-paid common-area utilities
- Property insurance
- Mortgage debt service
- Management expense
Show answer and explanation
Answer: C. Mortgage debt service
Debt service reflects the owner's financing. NOI is calculated before mortgage principal and interest.
5. An investor contributes $180,000 cash. NOI is $62,000 and annual debt service is $44,000. What is the simplified cash-on-cash return?
- 24.44%
- 34.44%
- 10%
- 68.89%
Show answer and explanation
Answer: C. 10%
Cash flow is $62,000 - $44,000 = $18,000. Cash-on-cash return is $18,000 / $180,000 = 10%.
6. Effective gross income is already $120,000 after the stated vacancy allowance. Model-defined operating expenses total $45,000. No other adjustment applies. What is NOI?
- $165,000
- $69,000
- $75,000
- $114,000
Show answer and explanation
Answer: C. $75,000
Subtract $45,000 once from the already effective income to get $75,000. Do not deduct the same vacancy allowance again.
7. The stated $120,000 potential gross income already includes $6,000 laundry revenue. A 5% loss applies to the whole $120,000 base, with no further other income. Operating expenses are $40,000. What is NOI?
- $80,000
- $86,000
- $76,000
- $74,000
Show answer and explanation
Answer: D. $74,000
Loss is $6,000, effective income $114,000 and NOI $74,000. Adding the already included laundry revenue again would overstate income.
8. Supplied NOI is $75,000 and expressly already includes the full $5,000 reserve deduction. Debt service is $50,000. No separate capital or other adjustment applies. What is the simplified after-debt amount?
- $30,000
- $20,000
- $75,000
- $25,000
Show answer and explanation
Answer: D. $25,000
Deduct only the stated debt service from that already adjusted NOI: $25,000. Deducting the same reserve again would produce $20,000 incorrectly.
9. A cap rate moves from 6% to 8%. What is the change in basis points?
- 20
- 33.33
- 2
- 200
Show answer and explanation
Answer: D. 200
One basis point is 0.01 percentage point. The change is 2 percentage points, or 200 basis points; the relative percentage increase is a separate calculation.
10. Which statement distinguishes direct capitalization from discounted cash-flow analysis?
- Direct capitalization uses the specified single-year income and cap rate; DCF discounts the expected series and specified net reversion
- Both must always use the investor's note interest rate as the cap rate
- Direct capitalization uses only gross rent and no expenses in every model
- DCF ignores when cash flows occur
Show answer and explanation
Answer: A. Direct capitalization uses the specified single-year income and cap rate; DCF discounts the expected series and specified net reversion
Use the actual valuation model. A cap rate, discount rate, note rate and total holding-period return are not interchangeable by their labels.
11. Does a higher cap rate alone prove that one property is a better investment?
- Yes, because loan payments can never affect the investor
- No; income quality, market evidence, condition, capital needs and risks matter
- Yes, regardless of the income definition
- No, because cap rate cannot be calculated from income and value
Show answer and explanation
Answer: B. No; income quality, market evidence, condition, capital needs and risks matter
The ratio is a specified income measure relative to price or value. A high percentage does not guarantee a bargain or total return.
12. Price is $1,200,000 and gross rent is a constant $10,000 monthly. Which monthly gross-rent multiplier follows those stated figures?
- 1,200
- 10
- 120
- 6.5%
Show answer and explanation
Answer: C. 120
$1,200,000 / $10,000 = 120 using monthly rent. Using $120,000 annual rent instead gives 10; apply each to its matching period.
13. A cash-on-cash formula has a zero cash-investment denominator. What follows from that formula alone?
- A guaranteed infinite return
- A measured 100% return
- No defined quotient; the cash-flow and investment convention needs further analysis
- Proof the investor has no risk
Show answer and explanation
Answer: C. No defined quotient; the cash-flow and investment convention needs further analysis
Division by zero is undefined. It does not establish an infinite guaranteed benefit or that borrowing and other risks have disappeared.
14. Annual NOI is $90,000, property value is $1,200,000 and annual debt service is $72,000. Which numerator belongs in the stated basic cap-rate calculation?
- $18,000
- $90,000
- $72,000
- $1,200,000
Show answer and explanation
Answer: B. $90,000
Cap rate uses NOI, before the separately stated debt service. The simplified after-debt $18,000 belongs to a different cash-flow calculation.
15. Monthly NOI is stipulated at a constant $6,000 for 12 months. Use an annual 8% cap rate. What is the indicated value?
- $576,000
- $900,000
- $75,000
- $72,000
Show answer and explanation
Answer: B. $900,000
Annualize first: $6,000 x 12 = $72,000. Divide by 0.08 to get $900,000; monthly NOI with the annual rate would mix periods.
16. The stated target value is $750,000 and the positive cap rate is 8%. What annual NOI supports that direct-capitalization equation?
- $750,000
- $60,000
- $6,000
- $9,375,000
Show answer and explanation
Answer: B. $60,000
Required NOI is value x rate: $750,000 x 0.08 = $60,000. It is not gross rent, investor cash flow or value divided by rate.
17. Annual before-tax cash flow is stipulated at $25,000. The defined initial cash investment includes $180,000 down payment, $20,000 closing costs and $50,000 initial unfinanced improvements, each counted once. No other adjustment applies. What is cash-on-cash return?
- 12.5%
- 7.2%
- 13.89%
- 10%
Show answer and explanation
Answer: D. 10%
Total stated cash invested is $250,000, so $25,000 / $250,000 = 10%. Using only the $180,000 down payment would omit $70,000 of the defined investment.
18. Using the stated NOI-based DSCR definition, annual NOI is $90,000 and annual debt service is $72,000. What is DSCR?
- 7.5%
- 10%
- 1.25 times
- 6%
Show answer and explanation
Answer: C. 1.25 times
$90,000 / $72,000 = 1.25 times. Do not substitute property value, loan balance or cash invested as this denominator; the result alone does not establish an actual lender approval or universal minimum.
19. Annual NOI is positive, but the supplied cap rate is zero. Does value = NOI / cap rate give a finite usable value?
- No; division by zero is undefined, and the assumptions need another supported analysis
- Yes; it proves a guaranteed infinite market value
- No; NOI can never be expressed annually
- Yes; every property with a zero stated cap rate is worth zero
Show answer and explanation
Answer: A. No; division by zero is undefined, and the assumptions need another supported analysis
A zero denominator makes this quotient undefined. That does not establish that the property is valueless or infinitely valuable; another supported analysis is needed.
20. Annual NOI is $60,000, annual debt service $75,000 and total cash invested $300,000. No other adjustment applies. What is the simplified before-tax cash-on-cash return?
- Positive 5%
- Negative 5%
- Zero because the calculation cannot be negative
- 20%
Show answer and explanation
Answer: B. Negative 5%
Cash flow is -$15,000. Divide by the positive $300,000 cash investment to get -5%. A positive property NOI does not guarantee a positive investor cash yield.
Common questions
What is net operating income?
Under the stated model, subtract its operating expenses from effective income before mortgage debt service, owner income tax and tax depreciation. Keep the income period consistent. The model must also specify reserve treatment; the same label does not guarantee that every accounting or underwriting statement includes identical deductions.
What are the three cap-rate formulas?
Using compatible annual NOI, positive value and positive decimal cap rate: cap rate = NOI / value; value = NOI / cap rate; NOI = value x cap rate. Multiply a decimal rate by 100 for percent. One year's gross rent or after-debt investor cash flow is not automatically the NOI numerator.
How do I estimate value from NOI?
Divide the stated stabilized annual NOI by a supported cap rate in decimal form. The original $104,000 / 0.08 calculation gives $1,300,000. Income and rate must use compatible definitions and assumptions. That indication is not a guarantee of sale price, a complete appraisal or a current market-rate recommendation.
Which expenses belong in basic cap-rate NOI?
Use the model's property operating expenses, such as property tax, insurance, management, owner-paid utilities and routine maintenance. Mortgage principal and interest, owner income tax and tax depreciation do not belong in the basic operating numerator. Capital purchases and replacement allowances need their own definitions; do not infer that every reserve is excluded just because a full capital purchase is separate.
Are replacement reserves included in NOI?
The named definition matters. OCC's cited underwriting NOI includes an imputed replacement reserve even if not funded. The identified Fannie Mae multifamily glossary defines NCF by subtracting the full underwritten replacement reserve from NOI, whether deposits are made or not. If supplied NOI already includes a reserve deduction, do not deduct it a second time. Do not mix a comparable's pre-reserve rate with a subject's post-reserve income without an appropriate consistent analysis.
Why is debt service outside basic NOI?
NOI describes the defined property operating result before the owner's financing. Debt service reflects the particular loan arrangement. To reach the simplified before-tax cash flow in these exercises, subtract stated annual debt service and any separately required adjustments once. A positive NOI does not guarantee positive after-debt cash flow.
What is cash-on-cash return?
For the stated convention, divide annual before-tax cash flow after the specified debt service and other stated adjustments by total cash invested, then express the result as a percentage. The denominator may include the down payment, closing costs and initial unfinanced improvements. Use the actual task's defined investment rather than substituting only part of it or current equity.
Must cap rate and cash-on-cash return be different?
No. They use different measures and need not match, but a numerical coincidence is possible. Under an all-cash example with no debt service or other adjustments and total cash invested equal to the same price base, they can match. Additional acquisition cash costs, debt service or a different value base can change that comparison. Neither measure alone captures the full investment outcome.
How does a higher cap rate affect value?
With positive NOI held fixed and positive cap rates, a higher denominator gives a lower direct-capitalization indication. At $60,000 NOI, 6% gives $1,000,000 and 8% gives $750,000. The move is 2 percentage points or 200 basis points, while value falls 25% from its starting point. Do not apply this fixed-income comparison as a guaranteed market forecast when income or other conditions also change.
How do vacancy and other income affect NOI?
Read the base. Apply a stated loss percentage only to the income specified by the exercise; rent-only and all-income bases differ. Do not subtract the same allowance again from already effective income or add other revenue already included. A stabilized market analysis can use a supported vacancy assumption different from actual occupancy; a fully leased building does not by itself prove that a zero allowance is appropriate.
Is GRM always a monthly figure?
The cited DRE chapter allows monthly or annual gross multipliers when the income basis and period are applied consistently. Its worked GRM method uses monthly rent; a question can expressly use another basis. At $1,200,000 price and $10,000 monthly rent, the monthly multiplier is 120 and the annual multiplier is 10. Expenses are not directly deducted by that gross ratio; it is not automatically a net cap rate or a number to average blindly across dissimilar comparables.
Is cash-on-cash return a discount rate or total return?
It is a stated-period cash-yield measure. It does not by itself include appreciation, equity gained through principal paydown, eventual sale proceeds or the time value of a complete series. DCF values the specified expected cash-flow series and net reversion using an appropriate discount rate. Do not substitute an investor's mortgage note rate or a cap-rate percentage for a discount rate without support.
What is a good Illinois cap rate?
These examples do not establish a universal benchmark or current market quote. Property type, location, condition, income quality, expense and reserve conventions, capital needs and market evidence matter. A higher percentage can accompany greater risk or different assumptions. The named Fannie Mae appraisal requirements apply to their covered program and applicable UAD policy, not automatically every Illinois property.
What practice score proves I am ready?
No validated readiness cutoff or pass probability is established for these original questions. Explain the numerator, denominator, period and closest wrong answer, then solve a fresh variation after a delay. The whole Calculations category weight does not give a quota for one formula, and these are not copied or recalled live PSI items. No permission for a particular exam tool is inferred.
Is appraisal NOI the same as taxable rental profit?
No. Tax reporting and valuation use different recognition and expense rules. IRS rental guidance describes cash-basis reporting for most individuals and tax depreciation among specified rental-expense topics; basic cap-rate NOI excludes tax depreciation and owner income tax. A refundable security deposit not applied as rent is also different from earned operating rent. This guide does not apply the IRS page's expressly dated 2018-2025 paragraph to 2026, decide QBI eligibility or prepare a private tax return.
What belongs in the cash-investment denominator?
Use the definition supplied. In the $25,000 annual cash-flow example, the stated $180,000 down payment, $20,000 closing costs and $50,000 initial unfinanced improvements total $250,000. The return is 10%, not the roughly 13.89% obtained by using only the down payment. Count each outlay once and keep the measurement date consistent. Current equity and a cash investment over time are different bases; one formula is not every investor's universal accounting convention.
Can these formulas handle zero or negative figures?
A positive investment denominator can produce a negative cash-on-cash result when cash flow is negative: -$15,000 / $300,000 = -5%. Zero cash invested makes that quotient undefined, not a guaranteed infinite return. A zero cap rate also makes NOI / rate undefined. The inverse value comparison here assumes fixed positive NOI and positive rates. A negative NOI may call for a different supported valuation analysis; a failed simplified formula does not prove the property has no value.
How are cap rate, debt yield, DSCR and cash-on-cash different?
Use the specified definitions and same annual period. Cap rate divides NOI by property value; debt yield divides NOI by the loan amount; the stated NOI-based DSCR divides NOI by annual debt service and is expressed as a multiple. Cash-on-cash divides the stated before-tax cash flow by cash invested. In the four-ratio example they are 7.5%, 10%, 1.25 times and 6%, respectively. Actual covenant definitions can differ, and these figures do not establish a universal loan minimum, approval or a suitable investment.
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Official sources and scope
Reviewed October 28, 2026 against the identified PSI outline, OCC and California DRE explanations, Fannie Mae definitions and appraisal guidance, IRS reporting distinctions, and the identified commercial-lender explanation of cash-on-cash return. Fresh readings and earlier actual readings are recorded separately. Named underwriting definitions are not universal accounting rules. Every number is an original classroom assumption, not a current cap-rate quote, property recommendation, tax conclusion or completed appraisal.
- PSI June 24, 2026 broker outline: calculations and income valuation
- California DRE Reference Book chapter 15: overall-rate and income arithmetic
- OCC Commercial Real Estate Lending handbook: income and value analysis
- Fannie Mae B4-1.3-10: separate income-approach lender context
- SEC Investor.gov glossary: basis point
- Fannie Mae multifamily: defined NCF subtracts replacement reserve from NOI
- IRS Topic 414: rental reporting differs from appraisal NOI
- Fannie Mae UAD 3.6 supplement: September 2026 income policy
- JPMorgan commercial real estate: cash-on-cash return and its limits
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.