A residential income property has annual EGI of $286,000. Operating expenses, excluding debt service, are 38% of EGI. What is the annual NOI?
Correct Answer
B) $177,320
286000×(1−0.38)=177320. Common errors: reporting the expenses instead of NOI gives $108,680; reporting EGI as NOI gives $286,000; dividing by 1.38 instead of multiplying by 0.62 gives $207,246.
Why This Is the Correct Answer
Option B is correct because expenses of 38% of EGI leave 62% as NOI: $286,000 × (1 − 0.38) = $286,000 × 0.62 = $177,320.
Why the Other Options Are Wrong
Option A: $108,680
Option A, $108,680, is the operating expense amount, not NOI: $286,000 × 0.38 = $108,680. NOI is EGI minus that amount, $286,000 − $108,680 = $177,320.
Option C: $207,246
Option C, $207,246, divides by 1.38 instead of multiplying by 0.62: $286,000 ÷ 1.38 ≈ $207,246. The correct calculation is $286,000 × 0.62 = $177,320.
Option D: $286,000
Option D, $286,000, reports EGI as if it were NOI and deducts no expenses. Subtracting the 38% expense ratio gives $286,000 × 0.62 = $177,320.
Expense ratio plus NOI ratio
The expense ratio and the net income ratio add up to 100% of EGI, so 38% expenses means 62% NOI.
How to use: Use this to turn an expense percentage into an NOI multiplier in one step.
Exam Tip
When a choice equals EGI times the expense ratio, recognize it as the expense figure, not NOI.
Common Mistakes to Avoid
- -Reporting the expense dollars as NOI
- -Dividing EGI by one plus the expense ratio
- -Forgetting to deduct expenses at all
Concept Deep Dive
Analysis
This question tests converting EGI to NOI using an operating expense ratio. If expenses are 38% of EGI, then NOI is the remaining 62% of EGI. $286,000 × 0.62 = $177,320.
Background Knowledge
The operating expense ratio is total operating expenses divided by effective gross income. Its complement, one minus the expense ratio, is the net income ratio. NOI is annual gross income less operating expenses, excluding debt service.
Real-World Application
An appraiser finds that comparable residential income properties run operating expenses at about 38% of EGI. Applying that ratio to the subject's $286,000 EGI, the appraiser estimates NOI of $177,320.
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