A seller's operating statement for an apartment building lists taxes, insurance, management and the mortgage payment. Which of these must be removed before computing net operating income?
Correct Answer
D) Mortgage principal and interest payments
Why this is correct: Net Operating Income (NOI) is defined as income after all operating expenses but before financing costs and income taxes. Mortgage payments (principal and interest) are financing costs, not operating expenses, and must be removed to calculate NOI. Why the other choices are wrong: 'Property insurance premiums,' 'Management fees,' and 'Real estate taxes' are all legitimate operating expenses that are deducted before arriving at NOI. Exam tip: NOI is 'debt-free' and 'tax-free.' If it's a loan payment or income tax, it's not in NOI.
Why This Is the Correct Answer
Why this is correct: Net Operating Income (NOI) is defined as income after all operating expenses but before financing costs and income taxes. Mortgage payments (principal and interest) are financing costs, not operating expenses, and must be removed to calculate NOI. Why the other choices are wrong: 'Property insurance premiums,' 'Management fees,' and 'Real estate taxes' are all legitimate operating expenses that are deducted before arriving at NOI. Exam tip: NOI is 'debt-free' and 'tax-free.' If it's a loan payment or income tax, it's not in NOI.
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Previous Question
An appraiser is estimating the market rent for a retail property. The subject has a potential gross income of $250,000 based on market rents. Market data indicates a typical vacancy and collection loss factor for similar properties is 6%. Additional income from vending machines and billboard rentals is estimated at $8,000 annually. What is the subject's anticipated Effective Gross Income?
Next Question
In a percentage lease, rent is commonly structured as: