ExamPassCap Rate, NOI and Value Calculator
Value = net operating income ÷ cap rate, and cap rate = NOI ÷ price. NOI is potential rent (with vacant units at market rent), less vacancy and credit loss, plus other income, less operating expenses, all before any mortgage payments. Tenant recoveries are not added to income: only the expenses tenants do not recover are deducted. Build the NOI below, then get the value at your cap rate, the cap rate at the asking price, and the debt service coverage.
Build the net operating income to see the value, the cap rate and the coverage.
How does the calculator work?
It follows the cash-flow worksheet in the order the course uses:
| Line | Rule |
|---|---|
| Potential rental income (PRI) | Annual rent for every unit, vacant units at market rent |
| Less vacancy and credit loss | A percentage of PRI |
| = Effective rental income (ERI) | |
| Plus other income | Parking, signs, laundry, a rooftop antenna, annualized |
| = Gross operating income (GOI) | |
| Less operating expenses | A dollar figure of non-recoverable costs, or a percentage of GOI |
| = Net operating income (NOI) | Before financing |
Then one formula in three forms: value = NOI ÷ cap rate; cap rate = NOI ÷ value; NOI = value × cap rate. A higher cap rate on the same NOI gives a lower value.
Recoveries. When tenants reimburse taxes, maintenance and insurance (TMI), those payments are not income. Leave them out and deduct only the costs the tenants do not recover. Some market packages instead add recoveries to income and deduct every expense; the NOI matches only if every recoverable cost is in the expense line, so check the method before comparing two brochures.
Debt service coverage. NOI ÷ yearly principal and interest. Lenders want it above 1, often 1.20 or more. Dividing NOI by the required ratio gives the most debt service the property can carry. The mortgage is never an operating expense.
Worked example: a plaza in Guelph
A buyer looks at a retail plaza in Guelph listed at $5,600,000. Annual rents, with one vacant unit at market rent, total $412,000. The buyer allows 4% vacancy. Sign and ATM income is $7,800 a year. Operating expenses are $168,000, of which the tenants recover $131,000. The buyer wants a 6.75% return.
| Step | Working | Result |
|---|---|---|
| Vacancy and credit loss | $412,000 × 4% | −$16,480 |
| Effective rental income | $412,000 − $16,480 | $395,520 |
| Plus other income | $7,800 | |
| Gross operating income | $403,320 | |
| Less non-recoverable expenses | $168,000 − $131,000 | −$37,000 |
| Net operating income | $366,320 | |
| Value at 6.75% | $366,320 ÷ 0.0675 | $5,426,963 |
| Cap rate at the asking price | $366,320 ÷ $5,600,000 | 6.54% |
At the asking price the plaza returns 6.54%, below the buyer's 6.75%. At 6.75%, it supports about $5,427,000.
Frequently asked questions
Is the cap rate the same for every buyer?
No. The cap rate is the investor's own required return before financing. Market sales inform it, but a buyer who sees more risk asks a higher rate and should pay less. See cap rate in commercial real estate.
Why are mortgage payments left out of NOI?
Because NOI measures what the property earns, whoever owns it and however they finance it. Debt is tested separately with the coverage ratio. Subtracting mortgage payments before applying a cap rate is one of the most common exam errors.
Is this on Course 4 or Simulation 2?
Both. Course 4 introduces NOI, cap rate and debt coverage, and Simulation 2 asks you to run the full worksheet on a client's file. The Course 4 practice questions include a direct capitalization question.