When to use this formula
Use this formula when your inputs match the variables and units shown below. It is most useful for checking a calculator result, recreating the calculation in a spreadsheet or understanding which input has the biggest effect.
Quick use
Use NOI and cap rate for property operations; use cash-on-cash return when financing and cash invested matter.
Formula
NOI = effective gross income - operating expenses; cap rate = NOI / property value; cash-on-cash return = annual pre-tax cash flow / cash invested; prorated rent = monthly rent x occupied days / days in period.
Variables
Income, expenses, property value, debt service, cash invested and days in period should be clearly defined and dated.
Method notes
- Do not include debt service inside NOI.
- Use realistic vacancy and maintenance assumptions.
- Compare cap rate with cash-on-cash return to separate property quality from financing.
Example
A property with 60,000 NOI and 1,000,000 value has a 6% cap rate before financing.
Assumptions and limitations
Real estate estimates can miss vacancy, repairs, reserves, financing terms, taxes, capital expenditures, local rent rules and market liquidity.
When the formula is not enough
- If the result depends on live prices, rates or official thresholds, check the latest value from the named source before relying on it.
- If the topic is medical, tax, legal, lending or safety related, use the result as a learning aid and check primary guidance before acting.
- If units or time periods differ, convert them before comparing results.
- If rounding affects the decision, keep extra precision until the final step.
Common mistakes
- Treating gross rent as NOI.
- Ignoring capital expenditures.
- Comparing properties from different markets without adjusting risk.
FAQ
Why look at the formula instead of only the answer?
The formula shows which inputs actually drive the result. That makes it easier to spot a wrong unit, compare two scenarios or explain the answer to someone else.
Can different calculators use different formulas for the same topic?
Yes. Some topics have multiple accepted methods or simplified variants. When that matters, the calculator should say which method it uses and what is excluded.
Are formula pages updated?
Stable math formulas need occasional review. Formulas that depend on changing rules, prices or thresholds need a dated source before the page can make stronger claims.