QUICK ANSWER

NOI means net operating income. It is income from the property after vacancy and operating expenses, but before mortgage payments and income taxes. Cap rate equals NOI divided by value. Value equals NOI divided by cap rate. GRM equals price divided by gross rent. ROI equals profit divided by investment. For the Texas real estate exam, the most important skill is knowing which income number belongs in which formula.

4 formulas
NOI, cap rate, GRM, ROI
1 trap
NOI is before debt service
7 math items
on Pearson's national outline

Start Here

Income-property math looks harder than it is because several formulas use similar words.

The exam may give you:

  • Rent.
  • Vacancy.
  • Operating expenses.
  • Net operating income.
  • Property value.
  • Capitalization rate.
  • Gross rent multiplier.
  • Purchase price.
  • Investor profit.
  • Investor cash investment.

Your job is to slow down and label the number.

Most mistakes happen because candidates use the wrong income number.

For example:

NOI is not gross rent.
NOI is not cash flow after mortgage payments.
NOI is not profit after income taxes.

NOI is property income after operating expenses, before financing.

Once that clicks, cap rate math becomes much easier.

This guide covers the income approach math you are most likely to need for the Texas real estate exam:

  • How to calculate NOI.
  • How to use cap rate.
  • How to solve for value.
  • How to calculate GRM.
  • How to calculate ROI.
  • How to read investor logic without overcomplicating the problem.
  • How to avoid the debt-service trap.
  • How to practice with original exam-style examples.

Table Of Contents

What Pearson Tests

Pearson VUE's current Texas sales agent content outline lists Real Estate Math Calculations as 7 scored National/General items.

Under property valuation math, the outline includes:

  • Net Operating Income, or NOI.
  • Capitalization rate.
  • Equity in property.
  • Establishing a listing price.
  • Assessed value and property taxes.

Under Property Value and Appraisal, the outline also lists:

  • Income approach.
  • Gross rent and gross income multipliers.

Under Investment math, the outline lists:

  • Return on investment.
  • Appreciation.
  • Depreciation.
  • Tax implications on investment.

So ROI, cap rate, GRM, and NOI are not side topics. They sit inside the exam's valuation and investment math.

This article uses original educational examples, not copied exam questions.

Core Formula Sheet

Memorize these relationships.

Need Formula
Potential gross income Rent if everything is collected
Effective gross income Potential gross income - vacancy and collection loss
NOI Effective gross income - operating expenses
Cap rate NOI / value
Value NOI / cap rate
NOI from value and cap rate Value x cap rate
GRM Price / gross rent
Price from GRM Gross rent x GRM
Gross rent from price and GRM Price / GRM
ROI Profit / investment
Equity Value - debt

Convert percentages before calculating:

Percent Decimal
5% 0.05
6% 0.06
7% 0.07
8% 0.08
9% 0.09
10% 0.10
12% 0.12

If the formula asks for a rate, your decimal answer usually needs to be converted back into a percentage.

0.08 = 8%

The Income Math Ladder

Before formulas, understand the ladder.

Income-property questions usually move from rent to value:

Rent
minus vacancy
= effective income
minus operating expenses
= NOI
then use NOI with cap rate
= value

That is the cleanest way to think about the income approach.

GRM is simpler and rougher:

Gross rent x multiplier = value estimate

ROI is investor-focused:

Profit / investment = return

Here is the difference:

Metric Main question it answers
NOI How much income does the property produce before financing?
Cap rate What return does the property income suggest relative to value?
Value from cap rate What is the property worth based on income and market rate?
GRM What value is suggested by gross rent and a multiplier?
ROI What did the investor earn compared with what the investor put in?

Do not use one metric when the question asks for another.

NOI Explained

NOI stands for net operating income.

A simple exam formula is:

NOI = effective gross income - operating expenses

If the question does not mention vacancy, it may simply use:

NOI = gross income - operating expenses

If the question gives vacancy:

Effective gross income = potential gross income - vacancy loss

Then:

NOI = effective gross income - operating expenses

What counts as operating income?

Operating income can include:

  • Apartment rent.
  • Commercial rent.
  • Parking income.
  • Laundry income.
  • Storage income.
  • Other ordinary property income stated in the problem.

Use what the question gives you.

What counts as vacancy and collection loss?

Vacancy and collection loss means expected income that is not collected.

Example:

Potential gross income: $120,000
Vacancy and collection loss: 5%

$120,000 x 0.05 = $6,000

$120,000 - $6,000 = $114,000

Effective gross income: $114,000.

What counts as operating expenses?

Operating expenses can include:

  • Property management.
  • Repairs and maintenance.
  • Utilities paid by the owner.
  • Insurance.
  • Property taxes.
  • Advertising.
  • Cleaning.
  • Supplies.
  • Legal or accounting costs related to operations.
  • Reserves for replacement if the question includes them.

Use only the expenses the question tells you to use.

What does not belong in NOI?

This is a major exam trap.

NOI is before financing.

Do not subtract:

  • Mortgage principal.
  • Mortgage interest.
  • Debt service.
  • Income taxes.
  • Owner's personal expenses.
  • Depreciation for income tax purposes, unless the question specifically tells you to calculate a different metric.

If a problem asks for cash flow after debt service, then subtract debt service.

If a problem asks for NOI, do not subtract debt service.

Capitalization Rate Explained

Capitalization rate, usually called cap rate, compares NOI to property value.

Formula:

Cap rate = NOI / value

Example:

NOI: $80,000
Value: $1,000,000

$80,000 / $1,000,000 = 0.08

Cap rate: 8%.

What cap rate means in plain English

A cap rate is an income-return relationship based on the property, not the buyer's loan.

If a property has an 8% cap rate, that does not mean the buyer personally earns exactly 8% after loan payments, taxes, and all personal circumstances.

It means:

The property's NOI is 8% of its value.

That distinction matters.

Cap rate is property-level income logic.

ROI is investor-level profit logic.

Cap rate triangle

Use this triangle:

        NOI
Value x Rate

Cover the thing you need.

If you need rate:

Rate = NOI / value

If you need value:

Value = NOI / rate

If you need NOI:

NOI = value x rate

The most common cap rate mistake is multiplying when you should divide.

If NOI is $90,000 and the cap rate is 9%, value is not:

$90,000 x 0.09

That gives $8,100, which is clearly too low for a property value.

The correct setup is:

$90,000 / 0.09 = $1,000,000

Value From NOI And Cap Rate

The income approach often estimates value by capitalizing income.

For exam math:

Value = NOI / cap rate

Example:

NOI: $72,000
Market cap rate: 8%

$72,000 / 0.08 = $900,000

Indicated value: $900,000.

Why value falls when cap rate rises

This can feel backwards at first.

Use the same NOI:

NOI: $72,000

At a 6% cap rate:

$72,000 / 0.06 = $1,200,000

At an 8% cap rate:

$72,000 / 0.08 = $900,000

At a 10% cap rate:

$72,000 / 0.10 = $720,000

Same income. Higher required rate. Lower indicated value.

That relationship is exam gold.

GRM Explained

GRM stands for gross rent multiplier.

It uses gross rent, not NOI.

Formula:

GRM = price / gross rent

To estimate value:

Value = gross rent x GRM

Example:

Sale price: $480,000
Monthly gross rent: $4,000

$480,000 / $4,000 = 120

Monthly GRM: 120.

If a similar property has monthly gross rent of $4,500 and the market monthly GRM is 120:

$4,500 x 120 = $540,000

Estimated value: $540,000.

Monthly GRM vs annual GRM

This is the biggest GRM trap.

If the question uses monthly rent, you get a monthly GRM.

If the question uses annual rent, you get an annual GRM.

Do not mix them.

Example:

Price: $600,000
Monthly gross rent: $5,000
Annual gross rent: $60,000

Monthly GRM:

$600,000 / $5,000 = 120

Annual GRM:

$600,000 / $60,000 = 10

Both can be correct. They are answering different versions of the question.

GRM vs cap rate

GRM uses gross rent.

Cap rate uses NOI.

Metric Uses Ignores
GRM Gross rent Vacancy and operating expenses
Cap rate NOI Loan payments and income taxes

GRM is quicker but less complete.

Cap rate is more income-focused because it uses NOI.

ROI Explained

ROI stands for return on investment.

Formula:

ROI = profit / investment

Example:

Investor cash investment: $200,000
Profit: $30,000

$30,000 / $200,000 = 0.15

ROI: 15%.

What counts as investment?

Use the number the question gives you.

Investment may mean:

  • Cash invested.
  • Down payment.
  • Initial equity.
  • Total project cost.
  • Purchase price.

The exam should tell you what number to use.

Do not assume cash invested equals purchase price if financing is involved.

What counts as profit?

Profit may mean:

  • Annual cash profit.
  • Gain on resale.
  • Total return.
  • Net operating result after specified expenses.

Again, use the wording.

ROI is not always the same as cap rate.

Metric Numerator Denominator
Cap rate NOI Property value
ROI Investor profit Investor investment

If the property has financing, cap rate and ROI may be very different.

Investor Logic

The Texas exam is not trying to turn you into a commercial analyst.

It wants to know whether you can protect the public by reading the facts, choosing the correct formula, and not making careless financial assumptions.

Here is the practical logic.

NOI is about the property

NOI tells you how the property performs before the owner's loan.

Two buyers could finance the same property differently, but the property's NOI does not change just because one buyer makes a larger down payment.

Cap rate is about income and value

Cap rate connects property income to value.

If two properties have the same NOI and one sells for much more, it has a lower cap rate.

Example:

Property A:

$60,000 NOI / $750,000 value = 0.08

Cap rate: 8%.

Property B:

$60,000 NOI / $1,000,000 value = 0.06

Cap rate: 6%.

Same NOI. Higher value. Lower cap rate.

GRM is about rent and price

GRM is a shortcut.

It can be useful when the exam asks for a gross rent multiplier or gives comparable rent-multiplier data.

But GRM does not adjust for expenses.

Two properties with the same rent can have very different expenses.

ROI is about the investor's return

ROI looks at the investor's actual investment and profit.

If a buyer uses leverage, the investor's cash investment may be much lower than the property price. That can change ROI.

For exam purposes, do not invent missing loan terms.

Use the numbers given.

Worked Examples

1. NOI Without Vacancy

A property produces $150,000 in annual gross income. Operating expenses are $55,000. What is NOI?

$150,000 - $55,000 = $95,000

Answer: $95,000.

2. Effective Gross Income

A property has potential gross income of $180,000. Vacancy and collection loss is 6%. What is effective gross income?

Vacancy:

$180,000 x 0.06 = $10,800

Effective gross income:

$180,000 - $10,800 = $169,200

Answer: $169,200.

3. NOI With Vacancy

Potential gross income is $180,000. Vacancy and collection loss is $10,800. Operating expenses are $62,000. What is NOI?

Effective gross income:

$180,000 - $10,800 = $169,200

NOI:

$169,200 - $62,000 = $107,200

Answer: $107,200.

4. Cap Rate

A property has NOI of $84,000 and a value of $1,200,000. What is the cap rate?

$84,000 / $1,200,000 = 0.07

Answer: 7%.

5. Value From Cap Rate

A property has NOI of $96,000. Comparable properties indicate an 8% cap rate. What is the indicated value?

$96,000 / 0.08 = $1,200,000

Answer: $1,200,000.

6. NOI From Value And Cap Rate

A property is worth $900,000 and has a 7% cap rate. What is NOI?

$900,000 x 0.07 = $63,000

Answer: $63,000.

7. Monthly GRM

A duplex sells for $420,000 and produces $3,500 per month in gross rent. What is the monthly GRM?

$420,000 / $3,500 = 120

Answer: 120.

8. Value From Monthly GRM

A similar duplex produces $3,800 per month in gross rent. The market monthly GRM is 120. What is the indicated value?

$3,800 x 120 = $456,000

Answer: $456,000.

9. Annual GRM

A property sells for $750,000 and has annual gross rent of $75,000. What is the annual GRM?

$750,000 / $75,000 = 10

Answer: 10.

10. ROI

An investor puts $250,000 into a project and earns $40,000. What is the ROI?

$40,000 / $250,000 = 0.16

Answer: 16%.

11. Cap Rate vs ROI

A property costs $1,000,000 and has NOI of $70,000. The investor puts in $250,000 cash and earns $30,000 after the expenses stated in the problem. What are the cap rate and ROI?

Cap rate:

$70,000 / $1,000,000 = 0.07

Cap rate: 7%.

ROI:

$30,000 / $250,000 = 0.12

ROI: 12%.

Answer: cap rate is 7%, ROI is 12%.

Practice Income Math Until The Setup Feels Obvious

Use the Texas real estate exam prep app to drill NOI, cap rate, value, GRM, ROI, vacancy, operating expenses, and investor-return questions with step-by-step explanations. Native Texas exam prep. Original questions. No copied exam questions. Not affiliated with TREC or Pearson VUE. Not a 180-hour pre-license course or a pass guarantee.

Practice Set

Try these before reading the answer key.

1. NOI

A property has annual gross income of $160,000 and operating expenses of $58,000. What is NOI?

2. Vacancy Loss

Potential gross income is $240,000. Vacancy and collection loss is 5%. What is the vacancy and collection loss amount?

3. Effective Gross Income

Using the same facts from question 2, what is effective gross income?

4. NOI With Vacancy

Potential gross income is $240,000. Vacancy and collection loss is $12,000. Operating expenses are $88,000. What is NOI?

5. Cap Rate

NOI is $75,000. Value is $1,250,000. What is the cap rate?

6. Value From Cap Rate

NOI is $75,000. Market cap rate is 6%. What is the indicated value?

7. NOI From Value And Cap Rate

Value is $800,000. Cap rate is 9%. What is NOI?

8. Value Direction

If NOI stays the same and the cap rate rises, what happens to indicated value?

9. Monthly GRM

A property sells for $540,000 and has monthly gross rent of $4,500. What is the monthly GRM?

10. Value From Monthly GRM

Monthly gross rent is $5,200. Market monthly GRM is 115. What is indicated value?

11. Annual GRM

A property sells for $900,000 and has annual gross rent of $100,000. What is the annual GRM?

12. Gross Rent From GRM

A property sells for $660,000. Monthly GRM is 110. What is monthly gross rent?

13. ROI

An investor puts in $180,000 and earns $27,000. What is ROI?

14. Cap Rate And ROI

A property costs $900,000 and has NOI of $72,000. The investor puts in $225,000 cash and earns $31,500 after the expenses stated in the problem. What are cap rate and ROI?

15. Debt Service Trap

A property has effective gross income of $150,000, operating expenses of $60,000, and annual mortgage payments of $42,000. What is NOI?

16. Cash Flow After Debt Service

Using the same facts from question 15, what is cash flow after debt service if the question asks for it?

17. Operating Expense Ratio

A property has effective gross income of $200,000 and operating expenses of $70,000. What percentage of effective gross income is operating expenses?

18. Cap Rate From Sale Comp

A comparable property sold for $1,600,000 and had NOI of $112,000. What cap rate does this sale indicate?

19. Value From Comparable Cap Rate

The subject property has NOI of $126,000. The comparable cap rate is 7%. What is the indicated value?

20. Monthly vs Annual GRM

A property sells for $720,000 and rents for $6,000 per month. What is the monthly GRM and annual GRM?

Answer Key And Explanations

1. NOI

$160,000 - $58,000 = $102,000

Answer: $102,000.

2. Vacancy Loss

$240,000 x 0.05 = $12,000

Answer: $12,000.

3. Effective Gross Income

$240,000 - $12,000 = $228,000

Answer: $228,000.

4. NOI With Vacancy

$240,000 - $12,000 = $228,000

$228,000 - $88,000 = $140,000

Answer: $140,000.

5. Cap Rate

$75,000 / $1,250,000 = 0.06

Answer: 6%.

6. Value From Cap Rate

$75,000 / 0.06 = $1,250,000

Answer: $1,250,000.

7. NOI From Value And Cap Rate

$800,000 x 0.09 = $72,000

Answer: $72,000.

8. Value Direction

If NOI stays the same and cap rate rises, indicated value falls.

Answer: value falls.

9. Monthly GRM

$540,000 / $4,500 = 120

Answer: 120.

10. Value From Monthly GRM

$5,200 x 115 = $598,000

Answer: $598,000.

11. Annual GRM

$900,000 / $100,000 = 9

Answer: 9.

12. Gross Rent From GRM

$660,000 / 110 = $6,000

Answer: $6,000 per month.

13. ROI

$27,000 / $180,000 = 0.15

Answer: 15%.

14. Cap Rate And ROI

Cap rate:

$72,000 / $900,000 = 0.08

Cap rate: 8%.

ROI:

$31,500 / $225,000 = 0.14

ROI: 14%.

Answer: cap rate is 8%, ROI is 14%.

15. Debt Service Trap

NOI excludes mortgage payments.

$150,000 - $60,000 = $90,000

Answer: $90,000.

16. Cash Flow After Debt Service

Cash flow after debt service subtracts mortgage payments because the question asks for it.

$90,000 - $42,000 = $48,000

Answer: $48,000.

17. Operating Expense Ratio

$70,000 / $200,000 = 0.35

Answer: 35%.

18. Cap Rate From Sale Comp

$112,000 / $1,600,000 = 0.07

Answer: 7%.

19. Value From Comparable Cap Rate

$126,000 / 0.07 = $1,800,000

Answer: $1,800,000.

20. Monthly vs Annual GRM

Monthly GRM:

$720,000 / $6,000 = 120

Annual gross rent:

$6,000 x 12 = $72,000

Annual GRM:

$720,000 / $72,000 = 10

Answer: monthly GRM is 120 and annual GRM is 10.

Common Mistakes

Mistake 1: Subtracting Mortgage Payments From NOI

NOI is before debt service.

If the question asks for NOI, do not subtract the mortgage payment.

If the question asks for cash flow after debt service, then subtract it.

Mistake 2: Using Gross Rent Instead Of NOI For Cap Rate

Cap rate uses NOI.

Gross rent belongs in GRM.

If you use gross rent in a cap rate problem, your answer will usually be too high.

Mistake 3: Mixing Monthly And Annual GRM

Monthly rent creates a monthly GRM.

Annual rent creates an annual GRM.

Make the rent period match the multiplier.

Mistake 4: Multiplying NOI By Cap Rate To Find Value

To find value from NOI and cap rate:

Value = NOI / cap rate

You multiply only when solving for NOI:

NOI = value x cap rate

Mistake 5: Confusing Cap Rate With ROI

Cap rate compares NOI to property value.

ROI compares investor profit to investor investment.

They can be different, especially when financing is involved.

Mistake 6: Treating Every Expense As Operating Expense

Operating expenses are property operating costs.

Loan payments, income taxes, and owner's personal expenses are not ordinary NOI operating expenses unless the problem tells you to calculate something other than NOI.

Mistake 7: Ignoring The Word "Potential"

Potential gross income is before vacancy.

Effective gross income is after vacancy and collection loss.

If a question gives both, do not use potential gross income as if it were effective income.

How To Study This Topic

Use a four-step routine.

Step 1: Label The Income

Before calculating, write:

PGI
EGI
NOI
gross rent
profit

The label tells you the formula.

Step 2: Build NOI From The Top Down

Start with potential income if given.

Subtract vacancy.

Then subtract operating expenses.

Stop before debt service.

Step 3: Use The NOI-Value-Rate Triangle

Practice these until automatic:

Cap rate = NOI / value
Value = NOI / cap rate
NOI = value x cap rate

Step 4: Separate GRM And ROI

GRM uses gross rent.

ROI uses investor profit and investor investment.

If a question gives both income and investor cash, decide what it actually asks.

Where This Fits In The Texas Math Cluster

ROI, cap rate, GRM, and NOI are the bridge between valuation and investment math.

If you need help with Read next
Big-picture exam math Texas real estate math: the only guide you need
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Investment basis and gain Appreciation, depreciation, and basis
Loan and buyer-cost math Loan-to-value, down payment, and points
Property tax math Property tax and mill-rate calculations
Closing debit and credit logic Proration: taxes, insurance, and rent at closing

FAQ

What is NOI on the Texas real estate exam?

NOI means net operating income. In simple exam math, NOI equals effective gross income minus operating expenses. NOI is before mortgage payments and income taxes.

What is cap rate?

Cap rate is NOI divided by property value. If NOI is $80,000 and value is $1,000,000, the cap rate is 8%.

How do I calculate value from NOI and cap rate?

Use value equals NOI divided by cap rate. If NOI is $90,000 and the cap rate is 9%, value is $1,000,000.

What is GRM?

GRM means gross rent multiplier. It equals price divided by gross rent. It can also estimate value by multiplying gross rent by the market GRM.

Is GRM the same as cap rate?

No. GRM uses gross rent. Cap rate uses NOI. GRM is a rent multiplier, while cap rate is an income-to-value relationship.

Is NOI the same as cash flow?

Not usually. NOI is before debt service. Cash flow after debt service subtracts loan payments. If the question asks for NOI, do not subtract the mortgage payment.

Is cap rate the same as ROI?

No. Cap rate compares NOI to property value. ROI compares investor profit to investor investment. Financing can make ROI different from cap rate.

Do I need to memorize these formulas?

Yes. You should know NOI, cap rate, value from cap rate, GRM, and ROI. Pearson's Texas outline includes NOI, capitalization rate, gross rent and gross income multipliers, and return on investment.

Should I practice this in the app?

Yes. Income math is one of the fastest areas to improve because the formulas repeat. The Texas real estate exam prep app gives you original NOI, cap rate, GRM, ROI, vacancy, and income-approach practice with explanations. Native Texas exam prep. Original questions. No copied exam questions. Not affiliated with TREC or Pearson VUE. Not a 180-hour pre-license course or a pass guarantee.

Are these copied exam questions?

No. The examples and practice questions in this article are original educational practice questions. The Texas real estate exam prep app also uses original questions. Native Texas exam prep. Original questions. No copied exam questions. Not affiliated with TREC or Pearson VUE. Not a 180-hour pre-license course or a pass guarantee.

Verification Note

This article was verified against the current Pearson VUE Texas real estate content outline and candidate handbook.

It is for educational exam prep, not legal, tax, accounting, appraisal, brokerage, or investment advice. Real-world income-property analysis can involve reserves, capital expenditures, financing, taxes, market risk, lease terms, and professional judgment beyond exam math. For the Texas real estate exam, use the numbers and instructions in the question.

Sources