All annual property operating expenses for the subject total $168,000, excluding debt service. Annual effective gross income after vacancy and collection loss is $410,000. What is the annual NOI?
Correct Answer
B) $242,000
410000−168000 = 242000. Common errors: adding the expenses instead of deducting them gives $578,000; reporting EGI as NOI gives $410,000; reporting the expenses instead of NOI gives $168,000.
Why This Is the Correct Answer
Option B is correct because NOI is EGI less operating expenses: $410,000 − $168,000 = $242,000. Debt service is excluded, as the question states.
Why the Other Options Are Wrong
Option A: $168,000
Option A, $168,000, is the operating expense figure, not NOI. NOI is what remains after those expenses: $410,000 − $168,000 = $242,000.
Option C: $410,000
Option C, $410,000, reports EGI as NOI and deducts no expenses. Subtracting the $168,000 of operating expenses gives $242,000.
Option D: $578,000
Option D, $578,000, adds the expenses instead of deducting them: $410,000 + $168,000 = $578,000. The correct calculation is $410,000 − $168,000 = $242,000.
EGI minus OE equals NOI
Think of it as a simple subtraction line: effective gross, minus operating expenses, equals net operating income.
How to use: Use this equation whenever EGI and expenses are given directly.
Exam Tip
Note whether the income given is already effective gross so you do not deduct vacancy a second time.
Common Mistakes to Avoid
- -Adding expenses to EGI
- -Reporting EGI as NOI
- -Reporting the expense total as NOI
Concept Deep Dive
Analysis
This question tests the basic definition of NOI as effective gross income less operating expenses. EGI is already given after vacancy and collection loss. $410,000 − $168,000 = $242,000.
Background Knowledge
Net operating income is annual gross income less operating expenses, before debt service. When EGI is given, vacancy and collection loss have already been taken out. NOI is the income figure used with an overall capitalization rate.
Real-World Application
A property manager reports $410,000 of collected income and $168,000 of operating costs for a rental property. The appraiser verifies the figures and calculates $242,000 of NOI.
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?
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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?
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Annual potential rental income is $600,000 and vacancy loss alone is $36,000. What percentage of potential rent does that loss represent?
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A residential income property has annual EGI of $286,000. Operating expenses, excluding debt service, are 38% of EGI. What is the annual NOI?
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