Property Valuation
In the income approach to value, what does the 'net operating income' (NOI) represent?
AGross income minus mortgage payments
BGross income minus vacancy and operating expenses (excluding debt service)✓ Correct
CTotal rent collected before expenses
DIncome after taxes and depreciation
Explanation
NOI equals effective gross income minus all operating expenses (management, insurance, taxes, maintenance, reserves) but before mortgage debt service. It is the basis for the income approach.
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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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