Florida Real Estate Sales Associate Examination Content OutlineReal Estate Investment and Business BrokerageMedium
A real estate investor is evaluating a potential apartment complex acquisition. The property has a gross potential income of $500,000, a vacancy and collection loss of 5%, and operating expenses (excluding debt service) totaling $150,000. What is the property's Net Operating Income (NOI)?
- A$325,000
- B$350,000
- C$475,000
- D$275,000
Show answer & explanationAnswer & explanation
Correct answer: A. $325,000
To calculate NOI, first determine the Effective Gross Income (EGI) by subtracting vacancy and collection losses from Gross Potential Income (GPI). EGI = $500,000 - ($500,000 * 0.05) = $500,000 - $25,000 = $475,000. Then, subtract operating expenses from EGI. NOI = $475,000 - $150,000 = $325,000.
Why the other options are wrong
- B. This is incorrect. This might result from incorrectly calculating vacancy or not subtracting it.
- C. This is incorrect. This represents the Effective Gross Income (EGI), not the Net Operating Income (NOI).
- D. This is incorrect. It might result from an error in calculating vacancy or subtracting expenses.
Net Operating Income (NOI)
A measure used to calculate the profitability of income-generating real estate. It equals all revenue from the property minus all reasonably necessary operating expenses.
- Calculated before debt service, depreciation, capital expenditures, and income taxes.
- Crucial for property valuation using the income capitalization approach.
- Reflects the property's ability to generate income from its core operations.
Memory trick: Gross to Net, carefully subtract.