A property has potential gross income of $150,000, vacancy and collection loss of 5%, and operating expenses of $45,000. What is the net operating income (NOI)?
Correct Answer
A) $97,500
NOI = (PGI - Vacancy) - Operating Expenses = ($150,000 - $7,500) - $45,000 = $142,500 - $45,000 = $97,500.
Why This Is the Correct Answer
Option A ($97,500) correctly follows the two-step NOI calculation process. First, the vacancy and collection loss of 5% ($7,500) is subtracted from the potential gross income of $150,000 to get effective gross income of $142,500. Then, operating expenses of $45,000 are subtracted from the effective gross income to arrive at the net operating income of $97,500. This systematic approach ensures all income adjustments are properly accounted for before determining the property's net income stream.
Why the Other Options Are Wrong
Option B: $105,000
Option B ($105,000) represents the result of subtracting only the operating expenses ($45,000) from the potential gross income ($150,000) without accounting for vacancy and collection losses, which is an incomplete calculation that overstates NOI.
Option C: $142,500
Option C ($142,500) represents only the effective gross income after deducting vacancy losses but fails to subtract the operating expenses, which is a critical omission that significantly overstates the net operating income.
Option D: $100,000
Option D ($100,000) appears to be an arbitrary figure that doesn't follow any logical calculation sequence from the given inputs and would result from incorrect mathematical operations or conceptual misunderstanding.
PEG-NOI Method
Remember 'PEG-NOI': Potential income → Effective income (subtract vacancy) → Gross operating income → Net Operating Income (subtract expenses). Think of it as 'pegging' down the income step by step.
How to use: When you see an NOI calculation question, immediately write 'PEG-NOI' and follow the sequence: start with potential income, subtract vacancy percentage to get effective income, then subtract operating expenses to reach NOI.
Exam Tip
Always perform NOI calculations in the correct sequence and double-check your vacancy calculation by multiplying the percentage by the potential gross income before subtracting from the total.
Common Mistakes to Avoid
- -Forgetting to subtract vacancy losses before calculating NOI
- -Subtracting operating expenses from potential gross income instead of effective gross income
- -Including debt service or capital expenditures as operating expenses
Concept Deep Dive
Analysis
This question tests the fundamental income approach calculation of Net Operating Income (NOI), which is a critical metric in real estate valuation. NOI represents the actual income a property generates after accounting for vacancy losses and operating expenses, but before debt service and capital expenditures. The calculation requires understanding the sequential flow from Potential Gross Income to Effective Gross Income (after vacancy deduction) to Net Operating Income (after operating expenses). This is one of the most important calculations in commercial real estate appraisal as NOI is used to determine property value through capitalization rates.
Background Knowledge
Net Operating Income is calculated by starting with Potential Gross Income, subtracting vacancy and collection losses to get Effective Gross Income, then subtracting operating expenses. Operating expenses typically include property taxes, insurance, maintenance, management fees, and utilities, but exclude debt service, depreciation, and capital improvements.
Real-World Application
Appraisers use NOI calculations daily when valuing income-producing properties like apartment buildings, office complexes, and retail centers, as NOI divided by the capitalization rate determines the property's estimated value using the income approach.
More Math & Stats Questions
What is the area of a triangular lot with a base of 120 feet and a height of 80 feet?
An irregular lot has the following measurements: Side A = 100', Side B = 150', Side C = 120', Side D = 180'. If the lot can be divided into two rectangles (100' × 150' and 120' × 30'), what is the total area?
A property has a potential gross income of $180,000, vacancy and collection loss of 7%, and operating expenses of $65,000. What is the NOI?
A property generates $120,000 in net operating income and is valued at $1,500,000. What is the capitalization rate?
A building has potential gross income of $180,000, vacancy and collection loss of 8%, and operating expenses of $54,000. What is the net operating income?
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