An appraiser is reconstructing the operating statement of a duplex from the owner's statement for the first nine months of the year. It shows rent collected of $40,500; utilities and routine maintenance, paid monthly, of $5,400; the annual property tax bill, paid in full, of $6,000; the annual insurance premium, paid in full, of $2,400; and mortgage payments of $9,900. Rents and monthly costs have been level and are typical of the market, and no other income or expense is expected. What is the annual net operating income?
Correct Answer
D) $38,400
Rent annualizes to $40,500 × 12/9 = $54,000, and monthly costs to $5,400 × 12/9 = $7,200. The tax bill and insurance premium are already full-year figures, so they stay at $6,000 and $2,400, giving NOI of $38,400. Scaling every line by 12/9 overstates the annual bills and gives $35,600. Skipping annualization gives $26,700, and deducting annualized mortgage payments gives $25,200.
Why This Is the Correct Answer
Option D is correct because rent is $40,500 × 12/9 = $54,000 and monthly costs are $5,400 × 12/9 = $7,200, while the tax bill of $6,000 and the premium of $2,400 are already annual. NOI is $54,000 − $7,200 − $6,000 − $2,400 = $38,400. Mortgage payments are not an operating expense.
Why the Other Options Are Wrong
Option A: $25,200
Option A, $25,200, starts from the correct $38,400 and then deducts annualized mortgage payments: $9,900 × 12/9 = $13,200. Debt service is a financing cost that is left out of NOI, so the figure stops below operating income.
Option B: $26,700
Option B, $26,700, treats the nine-month figures as a full year: $40,500 − $5,400 − $6,000 − $2,400. It omits three months of rent and monthly costs. Annualizing those two lines gives $38,400.
Option C: $35,600
Option C, $35,600, scales all operating lines: ($40,500 − $5,400 − $6,000 − $2,400) × 12/9. This turns the full-year tax and insurance bills of $8,400 into $11,200, overstating them by $2,800 compared with the correct $38,400.
Ask what period it covers
For each line, ask how many months the figure pays for. Scale nine-month lines by 12/9 and leave twelve-month lines alone.
How to use: Use this when an owner supplies year-to-date figures instead of a full-year statement.
Exam Tip
Do not apply one factor to the bottom line of a partial-year statement. Annualize line by line, then remove financing items.
Common Mistakes to Avoid
- -Multiplying the year-to-date bottom line by 12/9
- -Grossing up annual bills that have already been paid in full
- -Deducting mortgage payments in reaching NOI
Concept Deep Dive
Analysis
The skill is recognizing that a partial-year statement mixes two kinds of figures. Rent and monthly costs cover only nine months and must be scaled to twelve, while the tax bill and insurance premium were paid in full and already cover the year. Mortgage payments are a financing cost and do not belong in NOI at any scale.
Background Knowledge
Income and expenses are analyzed on an annual basis in direct capitalization, so a partial-year statement must be converted before use. Each line is examined for the period it actually covers. Some costs, such as taxes and insurance, are often billed once a year and may appear in full early in the year.
Real-World Application
An appraiser receives a year-to-date statement in October for a small rental property. The tax bill was paid in the spring and the insurance renewed in January, so only rent and monthly costs are grossed up before the appraiser compares the result with market expenses.
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
A comparable sold for a cash-equivalent price of $960,000 and has annual NOI of $80,000. The subject property has annual NOI of $75,000, measured on the same basis. The market indicates the same price-to-income ratio applies to the subject, and no other adjustments are needed. What is the subject's indicated value, rounded to the nearest dollar?
Next Question
The subject property is a four-unit apartment building whose owner manages it personally, pays no management fee and takes a $1,200 annual personal draw that does not appear on the operating statement. Effective gross income is $60,000 and the statement's expenses, including property taxes, total $24,000. Managers of competing buildings charge 5% of effective gross income. Sales of similar properties, analyzed with market management deducted, indicate an 8% overall rate. What is the indicated value by direct capitalization?