When calculating Net Operating Income (NOI) for the income approach in California, all of the following are deducted as operating expenses EXCEPT:
Correct Answer
D) Mortgage payments, including principal and interest on the existing loan
Mortgage payments (principal and interest) are NOT deducted when calculating NOI. NOI represents income before debt service — it reflects the property's earning power independent of how it is financed. Debt service is a function of the owner's financing, not the property's operating performance. This is a critical distinction in the income approach.
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- → A 4-unit apartment building in Sacramento has monthly rents of $1,500 per unit. The submarket vacancy rate is 5%. Annual operating expenses are $28,800. The prevailing cap rate for comparable properties is 6%. Using the income approach, what is the estimated value of the property?
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Previous Question
A California appraiser extracts a GRM from a comparable sale. A triplex in Anaheim sold for $975,000. The property was renting for a total of $4,875 per month at the time of sale. What is the Gross Rent Multiplier based on monthly rent?
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A California investor purchases an 8-unit apartment building in San Diego for $2,400,000. Each unit rents for $2,000/month. Operating expenses represent 40% of Effective Gross Income. The vacancy rate is 5%. What cap rate did the investor pay?