Real Estate Appraisal Practice Exam

To determine the net operating income of a property, subtract the total operating expenses from the ______.

1. Effective gross income

2. Gross income

3. Potential income

4. Net income

The correct answer is: Effective gross income

The net operating income (NOI) of a property is calculated by taking the effective gross income (EGI) and subtracting the total operating expenses. Effective gross income represents the total income generated by the property after accounting for vacancy losses and any credit losses. It is a more accurate reflection of the income that can realistically be expected compared to just gross income, which does not consider these adjustments. Using effective gross income provides a clear picture of the property's financial performance, allowing for a better assessment of its profitability. This is particularly important in real estate appraisal, as it helps appraisers determine the value of the property based on its income-generating capability. While gross income refers to the total income before any adjustments, and potential income represents the maximum possible income without considering any losses, both do not account for operating expenses as effectively as effective gross income does. Net income, on the other hand, is typically a term used to describe profits after all expenses, including financing, which makes it less applicable in calculating NOI specifically. Thus, utilizing effective gross income aligns perfectly with the objective of calculating net operating income.