Florida Real Estate Broker ExaminationValuation and Market AnalysisMedium
A real estate investor is analyzing a potential apartment complex purchase. The property has 20 units, each renting for $1,200 per month. Vacancy and collection losses are estimated at 5% of potential gross income. Annual operating expenses are $75,000. What is the Net Operating Income (NOI) for this property?
- A$198,600
- B$288,000
- C$273,600
- D$200,000
Show answer & explanationAnswer & explanation
Correct answer: A. $198,600
First, calculate Potential Gross Income (PGI): 20 units * $1,200/month/unit * 12 months/year = $288,000. Next, calculate Effective Gross Income (EGI): PGI * (1 - Vacancy Rate) = $288,000 * (1 - 0.05) = $288,000 * 0.95 = $273,600. Finally, calculate Net Operating Income (NOI): EGI - Operating Expenses = $273,600 - $75,000 = $198,600.
Why the other options are wrong
- B. This is the Potential Gross Income (PGI), before vacancy and expenses.
- C. This is the Effective Gross Income (EGI), before subtracting operating expenses.
- D. This is an incorrect calculation.
Net Operating Income (NOI)
Net Operating Income (NOI) is a measure of the profitability of income-generating real estate, calculated as potential gross income minus vacancy and collection losses and then minus operating expenses.
- NOI does not include debt service (mortgage payments), income taxes, or capital expenditures.
- It is a key figure used in the income capitalization approach to valuation.
- Formula: PGI - Vacancy/Collection Losses - Operating Expenses.
Memory trick: PGI minus Vacancy, then minus Expenses equals NOI.