Property Valuation
In the income approach to value, Net Operating Income (NOI) is calculated as:
AGross potential income minus vacancy and operating expenses✓ Correct
BGross rent minus the mortgage payment
CSale price divided by the number of units
DAssessed value multiplied by the cap rate
Explanation
NOI equals gross potential income minus vacancy/credit loss minus operating expenses (excluding debt service). It is the starting point for the income approach to appraisal.
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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.
Capitalization Rate (Cap Rate)A rate used to estimate the value of income-producing property, calculated as Net Operating Income divided by property value.
AppraisalA professional estimate of a property's market value prepared by a licensed or certified appraiser.
Gross Rent Multiplier (GRM)A quick valuation metric for income properties calculated by dividing the property price by gross annual rental income.
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