An appraiser estimates annual potential rent of $120,000 and combined vacancy and collection loss of $6,000. There is no other income. All annual property expenses, excluding debt service, are $45,000. What is the NOI?
Correct Answer
A) $69,000
120000−6000−45000 = 69000. Common errors: not deducting the vacancy and collection loss gives $75,000; reporting EGI as NOI gives $114,000; adding the expenses instead of deducting them gives $159,000.
Why This Is the Correct Answer
Option A is correct because EGI = $120,000 − $6,000 = $114,000, and NOI = $114,000 − $45,000 = $69,000. Debt service is excluded from the expenses, so no further deduction applies.
Why the Other Options Are Wrong
Option B: $75,000
Option B, $75,000, skips the vacancy and collection loss: $120,000 − $45,000 = $75,000. Deducting the $6,000 loss as well gives $69,000.
Option C: $114,000
Option C, $114,000, is EGI, not NOI: $120,000 − $6,000 = $114,000. Subtracting the $45,000 of expenses gives NOI of $69,000.
Option D: $159,000
Option D, $159,000, adds the expenses instead of subtracting them: $120,000 − $6,000 + $45,000 = $159,000. Expenses reduce income, so NOI is $114,000 − $45,000 = $69,000.
Two subtractions to NOI
From potential rent, subtract the loss, then subtract the expenses. Two minus signs take you from gross to net.
How to use: Use this to check that both deductions are made before reporting NOI.
Exam Tip
NOI must be less than EGI, which must be less than potential rent; an answer above potential rent is a sign of a sign error.
Common Mistakes to Avoid
- -Reporting EGI as NOI
- -Forgetting the vacancy and collection deduction
- -Adding expenses to income
Concept Deep Dive
Analysis
This question tests the basic path from potential rent to NOI when the vacancy and collection loss is given in dollars. Subtract the loss to get EGI, then subtract operating expenses to get NOI. The distractors skip a deduction or add expenses instead of subtracting them.
Background Knowledge
Potential gross income less vacancy and collection loss equals effective gross income. EGI less operating expenses equals net operating income. Debt service, depreciation and income taxes are not operating expenses.
Real-World Application
An appraiser valuing a fourplex estimates annual market rent, deducts a dollar allowance for vacancy and bad debts, and subtracts taxes, insurance, repairs and management to estimate NOI.
More Income Approach Questions
Which stated cause of supported value loss is external?
Improvement cost new is $450,000. Separately supported improvement depreciation deductions of $45,000, $25,000, $15,000 are expressly nonoverlapping and not already excluded from cost new. Add supported site value of $125,000, already reflecting any site losses. What total indicated value results?
Which two depreciation categories may each be classified as curable or incurable by comparing the cost to remedy a deficiency with the value gained?
Improvement cost new is $800,000. Separately supported improvement depreciation deductions of $120,000, $80,000, $40,000 are expressly nonoverlapping and not already excluded from cost new. No site is included. What depreciated improvement amount results?
The principle of anticipation in real estate valuation states that:
Which highest-and-best-use criterion addresses whether a proposed use is allowed by zoning and applicable legal restrictions?
Three comparables produce adjusted indications of $312,000, $309,000 and $315,000, requiring gross adjustments of 9%, 14% and 22% respectively. Verification also establishes that the first sale is the closest competitive substitute and its adjustments are better supported than the other two. Which indication deserves the most weight on those facts?
When reconciling value indications from the three approaches to value, an appraiser should:
A property sold at a cash-equivalent price of $1,062,500. Its stabilized annual NOI is $85,000. What is the indicated overall rate?
In reconciliation, an appraiser should:
People Also Study
Real Estate Market
13.6% of exam
Property Description
11.8% of exam
Land or Site Valuation
4.5% of exam
Sales Comparison Approach
16.4% of exam
Cost Approach
13.6% of exam
Related Tools
Previous Question
A comparable sold for $320,000 and has an adjusted price of $312,000. Its area is 2,080 square feet. What adjusted overall price per square foot results?
Next Question
A comparable sold for $312,000. Apply a supported +3% time adjustment to that price, then a −$8,000 extra-bathroom adjustment expressly measured in effective-date dollars. What adjusted price results?