Property Valuation
In the income approach to value, Net Operating Income (NOI) is calculated as:
AGross rental income minus vacancy losses
BPotential gross income minus vacancy and credit losses minus operating expenses✓ Correct
CEffective gross income minus debt service
DGross income minus depreciation
Explanation
NOI = Potential Gross Income − Vacancy and Credit Losses − Operating Expenses. NOI does not deduct mortgage payments (debt service) or income taxes.
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Key Terms to Know
Net Operating Income (NOI)
The annual income generated by an income-producing property after subtracting operating expenses, but before debt service.
DepreciationA reduction in the value of an improvement (building) over time due to physical deterioration, functional obsolescence, or external factors.
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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