NOI first, and debt service is not an expense
A capitalization rate compares a property's income to its price, so the income has to be measured the same way every time. Net operating income is gross rent minus vacancy and collection loss minus operating expenses. Mortgage payments, depreciation and income tax are not operating expenses — they belong to the owner's financing and tax position, not the property's.
Worked example: $150,000 gross rent, $7,500 vacancy, $58,500 operating expenses, $60,000 annual debt service, $1,050,000 price. NOI = $150,000 − $7,500 − $58,500 = $84,000, and cap rate = $84,000 ÷ $1,050,000 = 8.0%. Forgetting the vacancy loss leaves $91,500 and gives 8.7%; subtracting the $60,000 debt service gives 2.3%; dividing the $150,000 gross rent by the price gives 14.3% and skips expenses entirely.
Run the formula the other way to get value
Value = NOI ÷ cap rate. A property producing $72,000 of NOI at a 9% cap rate is worth $72,000 ÷ 0.09 = $800,000. The relationship is inverse: at 8% the same income supports $900,000, so the lower the rate, the higher the value. Multiplying NOI by 9 gives $648,000, and multiplying by 0.09 gives $6,480, an amount far too small to be a property value.
Cash-on-cash measures the investor, not the property
Cash-on-cash return is annual before-tax cash flow divided by cash invested, and cash flow is NOI after debt service. With NOI of $84,000, debt service of $60,000 and $300,000 of cash invested: ($84,000 − $60,000) ÷ $300,000 = $24,000 ÷ $300,000 = 8.0%.
Read the denominator carefully. Dividing the $84,000 NOI by cash invested gives 28.0%, which is a cap-rate style computation rather than cash-on-cash; dividing the $24,000 cash flow by the building's $1,050,000 price gives 2.3%.