A property has annual effective gross income of $118,800. Its annual expenses are $43,800, and no other deductions apply. What income remains after deducting those expenses?
Correct Answer
B) $75,000
118800−43800 = 75000. Common errors: adding the expense instead of deducting it gives $162,600; not deducting the expense gives $118,800; reporting the expense instead of the remaining income gives $43,800.
Why This Is the Correct Answer
Option B is correct because $118,800 − $43,800 = $75,000. The annual expense is deducted from annual effective gross income, and no other deductions apply. The result is the income remaining after that deduction.
Why the Other Options Are Wrong
Option A: $43,800
Option A, $43,800, is the expense amount itself, not the income that remains. The remaining income is $118,800 − $43,800 = $75,000.
Option C: $118,800
Option C, $118,800, is effective gross income before deducting the $43,800 expense. After the deduction, $75,000 remains.
Option D: $162,600
Option D, $162,600, adds the expense instead of deducting it: $118,800 + $43,800. Expenses reduce income, so the answer is $118,800 − $43,800 = $75,000.
PGI, EGI, NOI ladder
Step down from potential gross to effective gross by removing vacancy, then down to net by removing operating expenses.
How to use: Use this ladder to place each income and expense figure in the right step.
Exam Tip
Easy arithmetic questions often include the starting figure and the expense as distractors. Confirm the answer is the remaining income.
Common Mistakes to Avoid
- -Adding expenses instead of subtracting them
- -Reporting the expense amount as the answer
- -Stopping at effective gross income without deducting expenses
Concept Deep Dive
Analysis
This question tests a basic income reconstruction step: subtracting the stated expense from effective gross income. Only the given expense is deducted. The remaining figure is the income after that deduction.
Background Knowledge
In income reconstruction, potential gross income less vacancy and collection loss gives effective gross income, and effective gross income less operating expenses gives net operating income. Each step subtracts a loss or expense from the prior income level.
Real-World Application
An appraiser reconstructs a duplex's operating statement, taking effective gross income from the rent roll and deducting the stated operating expenses. The result is the income figure used in later capitalization steps.
More Income Approach Questions
Which model describes yield capitalization of property benefits?
An appraiser is valuing a duplex. A market survey of recent duplex sales reports prices at 10.8 times potential gross income, with stabilized vacancy and credit loss of 10% of PGI and no other income. The subject's rent schedule is unavailable, but the property manager's records show collected income of $54,000 a year, in line with market rent and the 10% market loss. What value is indicated?
The subject property is a fourplex with annual EGI of $72,000 and operating expenses of $28,800. Of those expenses, $18,000 is fixed and $10,800 varies in direct proportion to EGI. The owner's annual mortgage payments are $21,000. An appraiser projects that EGI will fall 10% because of higher vacancy. What is the projected NOI?
Annual NOI available for debt service is $168,000 and total annual mortgage principal and interest debt service is $120,000. What is NOI ÷ debt service?
Annual PGI is $250,000 and combined vacancy and collection loss is explicitly 12% of that same PGI base. There is no other income. What annual EGI remains?
Annual PGI is $360,000 and combined vacancy and collection loss is explicitly 8% of that same PGI base. There is no other income. What annual EGI remains?
Annual PGI is $640,000. Combined vacancy and collection loss is 6.25% of PGI. There is no other income. What EGI remains?
An appraiser is updating a prior appraisal of a triplex with potential gross income of $60,000 and no other income. The prior appraisal used vacancy and credit loss of 5% of PGI, and a new survey of competing rentals indicates 8%. The operating expenses of $24,000 are property taxes, insurance and contract services that do not vary with occupancy, and the market overall rate remains 7.5%. By what percentages do effective gross income and indicated value decrease?
Annual potential rental income is $600,000 and vacancy loss alone is $36,000. What percentage of potential rent does that loss represent?
In the subject's market, lenders on fourplexes have lowered their typical loan-to-value ratio from 70% to 60%. The annual mortgage constant remains 5% and the equity dividend rate remains 10%. The subject's NOI has not changed. How does this affect the overall rate indicated by the band of investment and the indicated value?
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Previous Question
The subject property has annual NOI of $126,000. A comparable sold for a cash-equivalent price of $2,100,000 and has annual NOI of $147,000, measured on the same basis as the subject's. Sales in the market area indicate the same price-to-income ratio applies, and no other adjustments are needed. What value is indicated for the subject, rounded to the nearest dollar?
Next Question
The subject property has annual effective gross income of $112,000 and a net income ratio of 62.5% of EGI. The overall capitalization rate is 8%. What value is indicated by direct capitalization, to the nearest dollar?