A building has 8 units all renting at $850/month. The vacancy rate is 8%. Annual operating expenses are $30,000. What is the NOI?
Why $45,072 Is Correct
Answer A: $45,072
Gross potential income is 8 units x $850 x 12 months = $81,600. Subtract 8% vacancy ($6,528) to get effective gross income of $75,072. Net operating income equals effective gross income minus operating expenses: $75,072 - $30,000 = $45,072. Remember the order: vacancy comes off gross income first, then expenses; mortgage payments are not operating expenses.
Exam Tip: Real Estate Math
Math questions are formula-based. Memorize the key formulas: commission splits, proration, cap rate (NOI ÷ Value), GRM (Price ÷ Gross Rent), and LTV (Loan ÷ Value). Practice converting between annual and monthly figures.
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Key Terms to Know
The annual income generated by an income-producing property after subtracting operating expenses, but before debt service.
Debt-to-Income Ratio (DTI)A lender's measure of a borrower's monthly debt obligations relative to their gross monthly income, used to evaluate loan eligibility.
Capitalization Rate (Cap Rate)A rate used to estimate the value of income-producing property, calculated as Net Operating Income divided by property value.
Gross Rent Multiplier (GRM)A quick valuation metric for income properties calculated by dividing the property price by gross annual rental income.
Math Concepts
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