Investment Math on the NJ Real Estate Exam: GRM, Cash Flow and Cap Rate Problems

The short answer: Investment questions on the NJ salesperson exam come from two places in PSI's outline: "Rate of return/Capitalization rate" under Real Estate Calculations (7%) and the "income analysis approach" under Valuation (8%) (PSI candidate bulletin). Most problems use three relationships:

• NOI = effective gross income − operating expenses
• Value = NOI ÷ cap rate
• GRM = price ÷ gross rent

Work each problem in that order and watch for monthly and annual numbers.

This page is all worked problems. For definitions, see cap rate, equity and rate of return explained. For the rest of the exam math, see the parent guide, real estate math on the NJ PSI exam.

All figures below are made up for practice. They aren't typical NJ rents, prices or rates.

How do you build net operating income?

Lenders and appraisers start with the income a property would collect if fully leased. They subtract a vacancy allowance, add other income such as laundry or parking, then subtract operating expenses. Debt service (interest and principal), income taxes, depreciation and capital items are not operating expenses (OCC Commercial Real Estate Lending handbook).

Problem 1. An 8-unit building rents for $1,500 per unit per month. Vacancy and collection loss is 5% of rent. Laundry brings in $2,400 a year. Annual expenses are property taxes $18,000, insurance $6,000, maintenance $9,600 and management at 6% of effective gross income. The owner's mortgage payments total $60,000 a year. What is the NOI?

1. Potential gross rent: 8 × $1,500 × 12 = $144,000
2. Vacancy: 5% × $144,000 = $7,200
3. Effective gross income: $144,000 − $7,200 + $2,400 = $139,200
4. Management: 6% × $139,200 = $8,352
5. Operating expenses: $18,000 + $6,000 + $9,600 + $8,352 = $41,952
6. NOI: $139,200 − $41,952 = $97,248

The $60,000 mortgage is a distractor. It doesn't come out of NOI.

How do you solve cap rate problems three ways?

Cap rate ties income to value. Think of it as I = R × V (income = rate × value), the same part-rate-whole setup as percent word problems.

Notice the inverse relationship. At 7%, the same $97,248 NOI supports about $1,389,257. At 8%, it supports $1,215,600. A higher cap rate means a lower value for the same income, and exam questions often test that idea without any arithmetic.

What is a gross rent multiplier and how is it used?

A gross rent multiplier (GRM) compares price to gross rent and ignores expenses. PSI's outline doesn't name GRM. It sits under the income approach and is a standard textbook shortcut, so be ready for it. Smaller residential questions usually use monthly rent (GRM). Larger properties often use annual gross income (GIM). Read which one the question uses.

Problem 2. A comparable duplex sold for $540,000 and rents for $3,600 a month. The subject duplex rents for $3,200 a month. Estimate its value.

1. GRM from the comparable: $540,000 ÷ $3,600 = 150
2. Subject value: 150 × $3,200 = $480,000

Using annual rent instead: $540,000 ÷ $43,200 = a GIM of 12.5, and 12.5 × $38,400 gives the same $480,000. Mixing a monthly multiplier with annual rent is the classic trap.

How do cash flow and cash-on-cash return work?

Cap rate ignores financing. Cash flow and cash-on-cash return include it.

• Before-tax cash flow = NOI − annual debt service
• Cash-on-cash return = annual before-tax cash flow ÷ cash invested

Problem 3. Using the NOI from Problem 1, the buyer pays $1,280,000 with $320,000 down and $20,000 in closing costs. Annual debt service is $72,000.

1. Cash flow: $97,248 − $72,000 = $25,248
2. Cash invested: $320,000 + $20,000 = $340,000
3. Cash-on-cash: $25,248 ÷ $340,000 = 0.0743 → about 7.4%

If a question says "return on investment" or "rate of return," check what it divides by: the price (a cap-rate-style answer) or the cash invested.

What traps cost points on investment questions?

• Monthly vs annual. Convert rents before you divide or multiply.
• Debt service inside NOI. Mortgage payments never reduce NOI.
• Vacancy applied to the wrong number. Take it from gross rent unless the question says otherwise.
• Percent conversions. 7.5% is 0.075, not 0.75.
• Answering the wrong question. If it asks for value, a cap rate in the choices is a decoy.

Check whether a calculator is allowed before test day, since PSI's documents conflict. The exam math guide explains the issue. For concept questions on appraisal methods, see valuation and market analysis on the NJ exam.

Can you solve these four practice problems?

1. NOI is $54,000 and the cap rate is 9%. What's the value? $600,000
2. A $750,000 property has $48,750 NOI. What's the cap rate? 6.5%
3. A GRM of 140 applies to a house renting for $2,900 a month. Value? $406,000
4. NOI is $40,000, debt service is $31,000 and cash invested is $120,000. Cash-on-cash? 7.5%

If these went smoothly, test yourself under time with the practice exams. Agents who later work with buyers of rentals will use the same math: see working with investors as a new agent.

Ready to start? Business Elementary's 75-hour pre-licensing course is the required first step toward the exam.

Sources

• PSI New Jersey Candidate Information Bulletin (updated 2/1/2026), Sections III (Valuation) and XI (Real Estate Calculations): https://test-takers.psiexams.com/api/content/bulletin/1667
• OCC, Comptroller's Handbook: Commercial Real Estate Lending (Version 2.0, March 2022), glossary (NOI, capitalization rate) and valuation sections: https://www.occ.gov/publications-and-resources/publications/comptrollers-handbook/files/commercial-real-estate-lending/pub-ch-commercial-real-estate.pdf

Last reviewed: November 9, 2026