In the income approach, what is NOI used for?

• A. Value = PGI / NOI.
• B. Value = NOI + Cap Rate.
• C. Value = NOI / Cap Rate.
• D. Value = NOI × Cap Rate.

Answer: (C)

The essential idea is converting a property's operating income into value using the cap rate. In direct capitalization, value is found by dividing the net operating income by the capitalization rate. Net operating income is the income left after operating expenses but before financing costs and taxes, so it represents the property's actual operating cash flow. The cap rate reflects the return investors require for that level of income. Since cap rate is essentially NOI divided by value, solving for value gives Value = NOI / Cap Rate. The other formulas don’t align with this method: using potential gross income skips vacancies and expenses, adding the cap rate mixes units, and multiplying by the cap rate would not yield the market-based value investors use.