National Real Estate Exam (PSI)Valuation and Market AnalysisMedium
A commercial property has an annual potential gross income of $150,000. It is estimated to have a 5% vacancy and collection loss. Operating expenses for the year are projected to be $45,000. What is the property's Net Operating Income (NOI)?
- A$142,500
- B$90,000
- C$97,500
- D$105,000
Show answer & explanationAnswer & explanation
Correct answer: C. $97,500
First, calculate the effective gross income (EGI): $150,000 (Potential Gross Income) - ($150,000 * 0.05 vacancy) = $150,000 - $7,500 = $142,500. Then, subtract operating expenses from EGI to find NOI: $142,500 - $45,000 = $97,500.
Why the other options are wrong
- A. This is the Effective Gross Income (EGI), not the Net Operating Income (NOI).
- B. This might result from various miscalculations, e.g., if vacancy was applied to the wrong number or operating expenses were miscalculated.
- D. This would be if you incorrectly subtracted operating expenses from PGI before accounting for vacancy ($150,000 - $45,000 = $105,000).
Net Operating Income (NOI)
Net Operating Income (NOI) is a key metric in real estate valuation, representing a property's annual income after deducting all operating expenses, but before accounting for debt service (mortgage payments) and income taxes.
- Formula: NOI = Effective Gross Income (EGI) - Operating Expenses.
- EGI = Potential Gross Income (PGI) - Vacancy and Collection Losses.
- Does not include capital expenditures, debt service, or income taxes.
Memory trick: PGI, then vacancy's gone, EGI remains, then expenses are drawn, and NOI shines on.