An income-producing property has a gross rental income of $120,000, vacancy rate of 5%, operating expenses of $35,000, and debt service of $25,000. What is the Net Operating Income (NOI) for valuation purposes?
Correct Answer
B) $79,000
NOI = Effective Gross Income − Operating Expenses. Effective Gross Income = $120,000 × (1 − 0.05) = $114,000, so NOI = $114,000 − $35,000 = $79,000. Debt service is left out because it is a financing cost, not a cost of operating the property.
Why This Is the Correct Answer
$79,000 is correct. Effective gross income is $120,000 × 95% = $114,000. Subtracting operating expenses of $35,000 gives NOI of $79,000. The $25,000 of debt service is not deducted, because mortgage payments are a financing cost.
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