Appraisal formulas, with worked examples

Appraisal makes up 26 of the 50 scored questions, and a good number of those are arithmetic. These are the formulas that keep showing up, each worked through with real numbers.

Updated October 20, 2026

Direct capitalization

Value = Net operating income ÷ Capitalization rate

Rearrange it as needed: Rate = Income ÷ Value, and Income = Value × Rate.

Example. An office building has net operating income of $84,000, and comparable sales show a 7% capitalization rate. $84,000 ÷ 0.07 = $1,200,000. Divide by 0.07, not 0.7. That slip gives $120,000, which is exactly the kind of wrong answer the exam puts in the choices.

Getting from rent to net operating income

Potential gross rent − Vacancy and collection loss + Other income = Effective gross income
Effective gross income − Operating expenses = Net operating income

Example. 18,000 rentable square feet at $24 per square foot per year is $432,000 of potential gross rent. Take off 10% for vacancy and collection loss and you have $388,800. Add $6,000 of parking income for an effective gross income of $394,800. Subtract $150,000 of operating expenses: net operating income is $244,800. At an 8% cap rate, that indicates a value of $3,060,000.

Mortgage payments are not an operating expense. If a question lists debt service among the expenses, leave it out of NOI.

Gross rent multiplier

GRM = Sale price ÷ Monthly rent   then   Value = GRM × Subject's monthly rent

Example. A comparable house sold for $240,000 and rents for $2,000 a month, a GRM of 120. The subject rents for $1,900, so its indicated value is 120 × $1,900 = $228,000.

Cost approach and age-life depreciation

Value = Land value + (Replacement cost new − Accrued depreciation)
Depreciation % = Effective age ÷ Total economic life

Example. A building with an effective age of 15 years and a total economic life of 50 years is 30% depreciated. On a replacement cost new of $400,000 that is $120,000 of depreciation, leaving $280,000. Add the $80,000 land value: $360,000. Its remaining economic life is 50 − 15 = 35 years.

Sales comparison adjustments

Always adjust the comparable toward the subject, never the other way around. If the comparable has something better, subtract its value; if it is missing something the subject has, add.

Example. A comparable sold for $310,000 and has a garage worth $15,000 that the subject lacks. The adjusted price is $310,000 − $15,000 = $295,000.

Financing measures

Debt coverage ratio = Net operating income ÷ Annual debt service
Loaded cap rate = Capitalization rate + Effective tax rate

Example. NOI of $120,000 against $100,000 of annual debt service is a debt coverage ratio of 1.20. An 8% cap rate loaded with a 2.5% effective tax rate is 10.5%.

Appraisal ratio

Appraisal ratio = Appraised value ÷ Sale price

Example. A home appraised at $270,000 that sold for $300,000 has a ratio of 0.90. Ratio studies are built from these. See ratio study standards.

The tax on a property

Section 26.09(c) of the Tax Code subtracts partial exemptions to reach taxable value, then multiplies by the tax rate. Texas tax rates are stated per $100 of value, so divide the taxable value by 100 before multiplying.

Example. A homestead appraised at $300,000 gets the $140,000 school district homestead exemption, leaving $160,000 taxable. At a school tax rate of $1.10 per $100: $160,000 ÷ 100 × 1.10 = $1,760.

Texas License Prep is not affiliated with TDLR or PSI. This page is a study aid, not legal or tax advice. The official statutes and rules control.