Question

Again, here is a summary of the entire process we have been discussing. To find net operating income, we perform the following steps.

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)

In the income capitalization approach, the net operating income (NOI) is then capitalized into value by dividing by a rate.

For Example:

You are appraising a 12 unit apartment building. These are the figures you came up with for income, vacancy, and operating expenses.

Potential Gross Income $129,600

Other Income + 4,800

Vacancy and Credit Loss - 7,750

equals Effective Gross Income $126,650

Operating Expenses - 50,660

equals Net Operating Income $ 75,990

If you then went to the market and determined the appropriate overall capitalization rate was 9.5%, you would divide that into the net operating income. $75,990/.095 = $799,895, rounded to $800,000. This would be the indication of value by direct capitalization.

The different methods of calculating direct capitalization rates is beyond the scope of this course.

However, before we move on, let's look at a different category of capitalization rate. Look at the definition of yield capitalization on the next page."

Summary of Net Operating Income Calculation Process
a) Gross Annual Rental (PGI)
b) Other Income
c) Vacancy/Credit Loss (V&C)
d) Effective Gross Income (EGI)

Answer 1

The subject is Business and the question relates to the calculation of net operating income (NOI) and the process of income capitalization in real estate appraisal. The correct option is d) Effective Gross Income (EGI)

Step-by-step explanation:

The subject of this question is Business. It relates to the calculation of net operating income (NOI) and the process of income capitalization in real estate appraisal.

To find the NOI, you need to calculate the Effective Gross Income (EGI) by adding the Gross Annual Rental (PGI) and Other Income and subtracting the Vacancy/Credit Loss (V&C). Then, subtract the Operating Expenses (TOE) from the EGI to get the NOI. In the income capitalization approach, the NOI is divided by a rate, such as the overall capitalization rate, to determine the value of the property.

For example, in the given scenario, the calculated NOI is $75,990. If the appropriate overall capitalization rate is 9.5%, dividing the NOI by the rate would indicate a value of $800,000 for the 12-unit apartment building. The correct option is d) Effective Gross Income (EGI)