California Real Estate SalespersonProperty Valuation and Financial AnalysisMedium
A small office building has a Potential Gross Income (PGI) of $80,000 per year. The appraiser estimates a 5% vacancy and collection loss rate and operating expenses of $20,000 per year. What is the Net Operating Income (NOI) for this property?
- A$56,000
- B$64,000
- C$76,000
- D$60,000
Show answer & explanationAnswer & explanation
Correct answer: A. $56,000
First, calculate vacancy and collection loss: $80,000 * 0.05 = $4,000. Next, calculate Effective Gross Income (EGI): $80,000 - $4,000 = $76,000. Finally, subtract operating expenses to find NOI: $76,000 - $20,000 = $56,000.
Why the other options are wrong
- B. This is an incorrect calculation, possibly applying vacancy to the wrong base or making a math error.
- C. This is the Effective Gross Income (PGI - Vacancy Loss), not the NOI.
- D. This incorrectly subtracts only operating expenses from PGI, ignoring vacancy.
Net Operating Income (NOI)
A property's income after all operating expenses have been deducted, but before debt service, depreciation, and income taxes.
- NOI = Effective Gross Income - Operating Expenses
- Crucial metric for income property valuation (e.g., capitalization rate)
- Excludes capital expenditures, debt service, and income taxes
Memory trick: PGI minus Vacancy is EGI, then minus Expenses for NOI.