A commercial building is being analyzed for purchase with the following data: Annual rental income $240,000, vacancy rate 8%, operating expenses $45,000, debt service $85,000. What is the property's Net Operating Income (NOI)?
Correct Answer
B) $175,800
NOI is effective gross income minus operating expenses. Effective gross income = $240,000 × (1 − 0.08) = $220,800, so NOI = $220,800 − $45,000 = $175,800. Debt service is a financing cost and is not deducted in calculating NOI.
Why This Is the Correct Answer
This answer is correct. Effective gross income is $240,000 × 0.92 = $220,800. Subtracting operating expenses of $45,000 gives NOI of $175,800. Debt service is not an operating expense and is excluded.
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A commercial building has gross rental income of $240,000 annually and operating expenses of $85,000. If an investor wants a 9% cap rate, what should they pay for the property?
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