EGI is $286,000 and the market expense ratio for this property type is 38%. Indicated NOI is:
Correct Answer
D) $177,320
Why this is correct: The market expense ratio of 38% means expenses are 38% of Effective Gross Income (EGI). Therefore, the Net Operating Income (NOI) is the remaining 62% of EGI. The calculation is: NOI = EGI * (1 - expense ratio) = 286,000 * (1 - 0.38) = 286,000 * 0.62 = 177,320. Why the other choices are wrong: "$752,632, dividing EGI by the ratio" incorrectly divides EGI by 0.38, which would estimate property value, not NOI. "$108,680, the expense amount itself" calculates the expense (286,000 * 0.38) but incorrectly presents it as NOI. "$394,680, adding the ratio to EGI" adds 38% of 286,000 to 286,000, which is not a standard income approach calculation. Exam tip: Remember NOI = EGI - Expenses. When given an expense ratio, convert it to a net income ratio (1 - expense ratio) and multiply by EGI.
Why This Is the Correct Answer
Why this is correct: The market expense ratio of 38% means expenses are 38% of Effective Gross Income (EGI). Therefore, the Net Operating Income (NOI) is the remaining 62% of EGI. The calculation is: NOI = EGI * (1 - expense ratio) = 286,000 * (1 - 0.38) = 286,000 * 0.62 = 177,320. Why the other choices are wrong: "$752,632, dividing EGI by the ratio" incorrectly divides EGI by 0.38, which would estimate property value, not NOI. "$108,680, the expense amount itself" calculates the expense (286,000 * 0.38) but incorrectly presents it as NOI. "$394,680, adding the ratio to EGI" adds 38% of 286,000 to 286,000, which is not a standard income approach calculation. Exam tip: Remember NOI = EGI - Expenses. When given an expense ratio, convert it to a net income ratio (1 - expense ratio) and multiply by EGI.
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