California Real Estate SalespersonProperty Valuation and Financial AnalysisHard
A buyer is considering purchasing a 20-unit apartment building. The Potential Gross Income (PGI) is $240,000 per year. The appraiser estimates a vacancy and collection loss rate of 5%. Operating expenses, excluding debt service, are $70,000 per year. What is the Net Operating Income (NOI) for this property?
- A$158,000
- B$170,000
- C$162,000
- D$178,000
Show answer & explanationAnswer & explanation
Correct answer: C. $162,000
First, calculate the vacancy and collection loss: $240,000 * 0.05 = $12,000. Then, calculate the Effective Gross Income (EGI): $240,000 - $12,000 = $228,000. Finally, subtract operating expenses to find NOI: $228,000 - $70,000 = $158,000.
Why the other options are wrong
- A. Correct. PGI - (PGI * Vacancy Rate) - Operating Expenses = $240,000 - ($240,000 * 0.05) - $70,000 = $240,000 - $12,000 - $70,000 = $158,000.
- B. Incorrect, likely from miscalculating the vacancy or operating expenses.
- D. Incorrect, likely from not subtracting vacancy or miscalculating it.
Net Operating Income (NOI)
The income remaining after deducting all operating expenses from the effective gross income, but before deducting debt service or income taxes.
- Crucial for income capitalization approach
- Does not include mortgage payments or depreciation
- Calculated as Effective Gross Income - Operating Expenses
Memory trick: PGI Minus Vacancy, Then Minus Expenses