Cap Rate, Net Operating Income (NOI) & Gross Rent Multiplier (GRM)

Separate operating income, financing and valuation assumptions

This simplified model uses scheduled annual rent less a combined vacancy and collection-loss allowance, then subtracts annual operating expenses to estimate NOI. There is no other property income in this example. Operating expenses exclude debt service, depreciation and income taxes; document how reserves and capital expenditure are handled when comparing properties.

NOI divided by the purchase price is a cap-rate calculation, not an exact realized cash yield. Acquisition costs, later capital spending, taxes and changes in operations can affect investor cash returns. The sample numbers are assumptions, not a forecast.

Direct capitalization divides an assumed stabilized positive NOI by an assumed positive market rate. It is a valuation scenario, not a guaranteed sale price. The formulas reject nonnumeric inputs, nonpositive price or gross rent, negative expenses, vacancy outside 0–100%, and nonpositive capitalization rate. Negative NOI can still be shown, but this example does not capitalize it into a negative property value.

Property Capitalization Rate = ((GrossRent * (1 - Vacancy)) - OpEx) / Price

Computes unlevered annual NOI yield on acquisition price B2.

=IF(COUNT(B2:B6)<>5,"Invalid inputs",IF(OR(B2<=0,B3<=0,B4<0,B4>1,B5<0,B6<=0),"Invalid inputs",ROUND(((B3 * (1 - B4)) - B5) / B2, 4)))

Gross rent multiplier

Divide price by scheduled annual gross rent. This ignores vacancy and expenses and cannot by itself rank profitability.

=IF(COUNT(B2:B6)<>5,"Invalid inputs",IF(OR(B2<=0,B3<=0,B4<0,B4>1,B5<0,B6<=0),"Invalid inputs",ROUND(B2 / B3, 2)))

Effective gross income

Apply the combined vacancy and collection-loss assumption to scheduled rent.

=IF(COUNT(B2:B6)<>5,"Invalid inputs",IF(OR(B2<=0,B3<=0,B4<0,B4>1,B5<0,B6<=0),"Invalid inputs",B3*(1-B4)))

Net operating income

Subtract operating expenses from effective gross income. Negative NOI is retained.

=IF(COUNT(B2:B6)<>5,"Invalid inputs",IF(OR(B2<=0,B3<=0,B4<0,B4>1,B5<0,B6<=0),"Invalid inputs",ROUND((B3 * (1 - B4)) - B5, 2)))

Direct-capitalization scenario

Use positive stabilized NOI and the assumed market rate. This is a scenario estimate; no exit timing or selling costs are modeled.

=IF(COUNT(B2:B6)<>5,"Invalid inputs",IF(OR(B2<=0,B3<=0,B4<0,B4>1,B5<0,B6<=0),"Invalid inputs",IF(B3*(1-B4)-B5<=0,"Not applicable",ROUND((B3*(1-B4)-B5)/B6,2))))

Operating expense ratio

Divide operating expenses by effective gross income. At 100% vacancy the denominator is zero, so return Not applicable.

=IF(COUNT(B2:B6)<>5,"Invalid inputs",IF(OR(B2<=0,B3<=0,B4<0,B4>1,B5<0,B6<=0),"Invalid inputs",IF(B3*(1-B4)=0,"Not applicable",B5/(B3*(1-B4)))))

Further reading

• Microsoft Support — ROUND function
• California Board of Equalization — direct capitalization methodology