Effective gross income is $118,800 and operating expenses total $43,800. Net operating income is:
Correct Answer
B) $75,000
Why this is correct: Net Operating Income (NOI) equals Effective Gross Income minus Operating Expenses. Here, $118,800 - $43,800 = $75,000. Operating expenses typically include all normal expenses like management, reserves, taxes, and insurance. Why the other choices are wrong: "$62,000 after also deducting the reserves" incorrectly deducts reserves twice if they are already in the $43,800. "$118,800 less debt service, whatever that is" confuses NOI with cash flow (debt service is a financing cost, not an operating expense). "$81,000 before management fees" adds an arbitrary amount. Exam tip: NOI = EGI - Operating Expenses. Debt service is not an operating expense.
Why This Is the Correct Answer
Why this is correct: Net Operating Income (NOI) equals Effective Gross Income minus Operating Expenses. Here, $118,800 - $43,800 = $75,000. Operating expenses typically include all normal expenses like management, reserves, taxes, and insurance. Why the other choices are wrong: "$62,000 after also deducting the reserves" incorrectly deducts reserves twice if they are already in the $43,800. "$118,800 less debt service, whatever that is" confuses NOI with cash flow (debt service is a financing cost, not an operating expense). "$81,000 before management fees" adds an arbitrary amount. Exam tip: NOI = EGI - Operating Expenses. Debt service is not an operating expense.
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Previous Question
An appraiser calculates a gross rent multiplier (GRM) of 9.2 for a small office building based on its $184,000 annual gross rental income and $1,692,800 sale price. She then estimates the property’s net operating income as $138,000 after deducting a 25% vacancy and collection loss and $32,200 in operating expenses. What overall capitalization rate is implied by this NOI and sale price, and how does it compare to the rate implied by the GRM if the market’s typical operating expense ratio (OER) is 38%?
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Two identical buildings differ only in risk: one has a single tenant on a short lease, the other five tenants on staggered terms. How do their cap rates compare?