A property has annual effective gross income, after vacancy and collection loss, of $180,000. All annual property operating expenses total $65,000, excluding debt service. What is the annual NOI?
Correct Answer
B) $115,000
180000−65000 = 115000. Common errors: adding the expenses instead of deducting them gives $245,000; reporting EGI as NOI gives $180,000; reporting the expenses instead of NOI gives $65,000.
Why This Is the Correct Answer
Option B is correct because NOI equals EGI minus operating expenses: $180,000 − $65,000 = $115,000. Debt service is excluded from operating expenses.
Why the Other Options Are Wrong
Option A: $65,000
Option A, $65,000, is the operating expense figure rather than NOI. Subtracting it from EGI gives $180,000 − $65,000 = $115,000.
Option C: $180,000
Option C, $180,000, reports EGI as NOI without deducting any expenses. NOI is $180,000 − $65,000 = $115,000.
Option D: $245,000
Option D, $245,000, adds the expenses instead of deducting them: $180,000 + $65,000 = $245,000. The correct NOI is $180,000 − $65,000 = $115,000.
Net means after expenses
Net operating income is what is left after operating the property, so expenses are taken out of EGI, not added to it.
How to use: Use this to check the direction of the arithmetic on NOI questions.
Exam Tip
NOI must be less than EGI whenever there are operating expenses; an answer larger than EGI signals an addition error.
Common Mistakes to Avoid
- -Adding expenses to EGI
- -Treating EGI as NOI
- -Deducting debt service as an operating expense
Concept Deep Dive
Analysis
This question tests NOI as effective gross income less operating expenses. Because EGI is given after vacancy and collection loss, only expenses need to be deducted. $180,000 − $65,000 = $115,000.
Background Knowledge
NOI is the income remaining after operating expenses are paid but before debt service. It is the figure capitalized with an overall rate in direct capitalization. Because EGI already reflects vacancy and collection loss, no further vacancy deduction is needed.
Real-World Application
A rental property collects $180,000 after vacancy and spends $65,000 on taxes, insurance, maintenance and management. The appraiser calculates NOI of $115,000 to capitalize.
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