NOI = effective gross income − operating expenses (NOT debt service or depreciation)
Before you read
Test yourself first: 5 questions
Question 1 of 5
In the income approach, Value = Net Operating Income ÷ ____.
Answer: B. Value = NOI ÷ cap rate. A lower cap rate implies a higher value for the same NOI.
Question 2 of 5
Which valuation approach is generally MOST appropriate for estimating the value of an income-producing investment property such as an apartment building?
Answer: B. Income-producing properties are bought for the cash flow they generate, so the income approach, which converts income into value, is the most relevant method.
Question 3 of 5
Using the income approach, if a property has a net operating income of $60,000 and an appropriate capitalization rate of 8%, what is its indicated value?
Answer: C. Value equals NOI divided by cap rate: $60,000 / 0.08 = $750,000.
Question 4 of 5
Which figure is used directly in the income approach to estimate value with a capitalization rate?
Answer: C. Direct capitalization divides net operating income (NOI) by the cap rate to estimate value; NOI is income after operating expenses but before debt service.
Question 5 of 5
An appraiser values a 20-year-old duplex. The most reliable approach is likely:
Answer: B. Small residential income property leans on comparable sales and the income approach; reconciliation weighs them. Cost is weakest for older buildings (depreciation is hard to estimate), and GRM alone is a rough check, not a primary method.
Keep the streak going with more questions like these, each with a full rationale.
Must-know rules
- Cap rate: Value = NOI ÷ rate (IRV: Income = Rate × Value)
- NOI = effective gross income − operating expenses (NOT debt service or depreciation)
- Higher cap rate = riskier property = LOWER value for the same income
- GRM (quick check): price ÷ monthly rent; Value = rent × GRM
- Use for: apartments, offices, anything bought for its income stream
Income Approach — GRM & Cap Rate: FAQs
Is Income Approach — GRM & Cap Rate on the real estate exam?
Yes. Valuation & Appraisal is a scored domain on the real estate licensing exam, and this topic appears in the national portion.
Is this cheat sheet free?
Yes — every page on Cinna RE's resource library is free to read, print and share. The app adds practice questions, mock exams and a readiness score.
