Question

If you are an investor, or a lender, a better measure of the future success of an investment property and a better measure of its future benefits (remember the principle of anticipation) is income that remains after expenses are deducted.

Gross is what you start with - Net is what is left over!

There is a formula for calculating NOI. We have to follow a standardized procedure and take it one step at a time. Essentially, we have to estimate the amount of income the property could potentially generate, then subtract vacancy and collection loss, then subtract operating expenses, to arrive at an NOI.

Gross Annual Rental (Potential Gross Income, or PGI)

+ Other Income
- Vacancy/Credit Loss (V&C)
= Effective Gross Income (EGI)
- Operating Expenses (TOE)
= Net Operating Income (NOI)

a) True

b) False

Answer 1

The statement is true. Net Operating Income (NOI) provides a clear picture of an investment property's profitability by deducting vacancies, credit loss, and operating expenses from the gross income.

Step-by-step explanation:

The statement provided is true. In real estate investment, Net Operating Income (NOI) is a crucial measure that indicates the profitability of an investment property, minus all necessary operating expenses. The formula starts with calculating the Potential Gross Income (PGI) of the property, which is the total annual income the property could generate were it fully rented all year. To this, any Other Income is added, such as income from laundry facilities, parking, etc. Next, Vacancy and Credit Loss (V&C) is subtracted to account for the potential loss of income due to unoccupied units or uncollectable rent, resulting in Effective Gross Income (EGI).

From the EGI, Total Operating Expenses (TOE), which include costs such as property management fees, maintenance, insurance, and property taxes, are deducted to arrive at the NOI. This is the income left over that could potentially be used to pay mortgage payments and generate profit for the investor. As such, NOI provides a more accurate picture of a property's financial performance than simply looking at gross income.