The subject property's potential rental income is $84,000 per year, and vacancy and collection loss is 8% of that income. There is no other income. Annual property expenses, including all reserves and excluding debt service, are $28,000. What is the annual NOI?
Correct Answer
A) $49,280
84000×(1−0.08)−28000 = 49280. Common errors: not deducting the vacancy and collection loss gives $56,000; reporting EGI as NOI gives $77,280; adding the expenses instead of deducting them gives $105,280.
Why This Is the Correct Answer
Option A is correct because EGI is $84,000 × (1 − 0.08) = $77,280, and subtracting $28,000 of property expenses leaves NOI of $49,280. NOI is effective gross income less operating expenses, before debt service.
Why the Other Options Are Wrong
Option B: $56,000
Option B, $56,000, results from subtracting expenses directly from potential income ($84,000 − $28,000) without first deducting the 8% vacancy and collection loss. The correct figure is $77,280 − $28,000 = $49,280.
Option C: $77,280
Option C, $77,280, is the EGI ($84,000 × 0.92) reported as if it were NOI, with the $28,000 of expenses never deducted. NOI is $77,280 − $28,000 = $49,280.
Option D: $105,280
Option D, $105,280, comes from adding the $28,000 of expenses to EGI ($77,280 + $28,000) instead of subtracting them. Expenses reduce income, so NOI is $49,280.
Lose, then spend
First lose the vacancy from potential rent, then spend the operating expenses; what is left is NOI.
How to use: Use this order whenever you build NOI from potential gross income.
Exam Tip
Several answer choices often match intermediate steps such as EGI; finish every step the question asks for before choosing.
Common Mistakes to Avoid
- -Skipping the vacancy and collection loss deduction
- -Stopping at EGI and calling it NOI
- -Deducting mortgage payments as an operating expense
Concept Deep Dive
Analysis
This question tests the reconstruction of an operating statement from potential income down to NOI. Reduce potential rent by the 8% vacancy and collection loss to get EGI, then subtract operating expenses; debt service is excluded and there is no other income to add.
Background Knowledge
Potential gross income is the income at full occupancy; deducting vacancy and collection loss gives effective gross income. Subtracting operating expenses, including replacement reserves when the analysis uses them, yields net operating income, which is measured before debt service.
Real-World Application
An appraiser reviewing a fourplex's rent roll estimates full-occupancy rent, deducts a market-supported vacancy and collection allowance, and then subtracts taxes, insurance, maintenance and reserves to arrive at NOI for capitalization.
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Previous Question
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?
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A comparable sold at a cash-equivalent price of $1,000,000 and has stabilized annual NOI of $75,000. What overall capitalization rate does this comparable indicate?