What is the exam-ready distinction?
| Official syllabus topic | Valuation: Direct Capitalization and Gross Rent Multiplier |
|---|---|
| Official PSI area | Valuation and Market Analysis |
| Published weight | 8% of the 100-question national portion |
| Source edition | PSI Georgia Candidate Information Bulletin dated July 1, 2026 |
The Rule
PSI publishes a weight for the complete official area, not a guaranteed count for this individual comparison. Use the source, document, actor, event, and timing stated in the question before applying a memorized definition.
Side-by-side comparison
Read across each row. The terms are deliberately compared on identical dimensions so the difference remains clear when the exam hides the vocabulary inside a scenario.
| Decision dimension | Capitalization rate | Gross rent multiplier |
|---|---|---|
| Income base | Net operating income | Gross rent |
| Form | Rate expressed as a percentage | Multiplier expressed as a number |
| Market relationship | Cap rate = NOI ÷ value; value = NOI ÷ cap rate | GRM = price ÷ gross rent; value estimate = rent × GRM |
| Use | Income-property return and value indication | Quick comparison or estimate for small rentals when consistent market data exists |
Decision rule
Georgia-specific distinction
Worked example
Scenario. An investment property has annual NOI of $60,000, and comparable investments indicate a 7.5 percent capitalization rate.
Reason it through. The question supplies NOI and a percentage return, so use direct capitalization: $60,000 ÷ 0.075.
Answer. The indicated value is $800,000 using the capitalization rate.
Common exam traps
- Treating cap rate as a multiplier
- Using gross income as NOI
- Mixing monthly rent with an annual GRM
- Assuming cap rate includes mortgage financing terms
Original practice questions with detailed explanations
These are original instructional questions mapped to the July 1, 2026 PSI outline. They are not copied from PSI or any live examination. Choose an answer before opening the explanation.
Question 1An investment property has annual net operating income of $60,000, and comparable sales indicate a 7.5 percent capitalization rate. What is the indicated value?
- A. $4,500
- B. $80,000
- C. $450,000
- D. $800,000
Show answer and explanation →
Answer: D. $800,000
Value equals NOI divided by the cap rate: $60,000 ÷ 0.075 = $800,000. Multiplying by 7.5 treats the rate like a gross rent multiplier and gives $450,000, and $4,500 comes from multiplying by 0.075 instead of dividing.
Question 2A small rental house sells for $180,000 and rents for $1,500 per month. What is its gross rent multiplier based on monthly rent?
- A. 0.83
- B. 10
- C. 120
- D. 1,200
Show answer and explanation →
Answer: C. 120
GRM equals sale price divided by gross rent, and the question asks for the monthly figure: $180,000 ÷ $1,500 = 120. The answer 10 uses annual rent of $18,000, which fits only an annual multiplier, so match the units the question asks for.
Question 3A small apartment building has annual gross rent of $96,000, operating expenses of $36,000, and a market cap rate of 8 percent. Which calculation gives the indicated value by direct capitalization?
- A. $60,000 ÷ 0.08, using net operating income
- B. $96,000 ÷ 0.08, using gross rent as income
- C. $96,000 × 8, treating the rate as a multiplier
- D. $36,000 ÷ 0.08, using the operating expenses
Show answer and explanation →
Answer: A. $60,000 ÷ 0.08, using net operating income
Cap rate relates net operating income to value, so subtract expenses first: $96,000 minus $36,000 is $60,000, and $60,000 ÷ 0.08 = $750,000. Dividing gross rent by the rate is the most common error because it skips expenses, which only the gross rent multiplier ignores.
Ready to move on?
You have this distinction down when all of these are true.
- Define every compared term without using the other term as the definition.
- Rebuild the comparison table from memory.
- State the decision rule and Georgia distinction without notes.
- Solve the worked example after changing one key fact.
- Explain the rule or fact that makes each distractor wrong.
- Answer all three original questions correctly in mixed practice on a later day.
Recommended next lesson
Continue with Dual Agency Versus Designated Agency in Georgia. The next article moves from investment math to agency, explaining how Georgia allows dual agency with everyone's written consent and how designated agency splits representation between two licensees in one firm.
Return to the complete exam-concept library or the Valuation and Market Analysis hub.