Where this fits on the exam
| Official syllabus topic | Valuation: Income Approach, Effective Gross Income, and Net Operating Income |
|---|---|
| Official PSI area | Valuation and Market Analysis |
| Published weight | 8% of the national portion |
| Source edition | PSI Georgia Candidate Information Bulletin dated July 1, 2026 |
The Rule
PSI publishes a weight for the complete official area, not a guaranteed count for this individual comparison. Use the source, document, actor, event, and timing stated in the question before applying a memorized definition.
Side-by-side comparison
Read across each row. The terms are deliberately compared on identical dimensions so the difference remains clear when the exam hides the vocabulary inside a scenario.
| Decision dimension | Potential gross income | Effective gross income | Net operating income |
|---|---|---|---|
| Meaning | Full scheduled potential property income before vacancy and collection loss | Income after vacancy and collection loss plus qualifying other income | Income remaining after operating expenses |
| Formula step | Scheduled rental and other potential income | PGI - vacancy and collection loss; add other income only if the starting figure excludes it | EGI - operating expenses |
| Includes | Full scheduled potential | Expected collected property income | Property-level return before financing and income tax |
| Excludes | Vacancy deduction at this first step | Operating expense deduction at this step | Debt service, owner income tax, book depreciation, and usually capital expenditures |
Decision rule
Georgia-specific distinction
Worked example
Scenario. An apartment property has $180,000 potential rent, $9,000 vacancy and collection loss, $6,000 laundry income, and $62,000 operating expenses.
Reason it through. Effective gross income is $180,000 - $9,000 + $6,000 = $177,000. NOI is $177,000 - $62,000.
Answer. Effective gross income is $177,000 and NOI is $115,000.
Common exam traps
- Calling potential income collected income
- Subtracting operating expenses before finding EGI
- Subtracting debt service from NOI
- Mixing monthly and annual figures
Original practice questions with detailed explanations
These are original instructional questions mapped to the July 1, 2026 PSI outline. They are not copied from PSI or any live examination. Choose an answer before opening the explanation.
Question 1A 20-unit building rents each unit for $1,100 a month. Vacancy and collection loss is 5% of scheduled rent, and laundry and parking bring in $6,000 a year. What is the annual effective gross income?
- A. $250,800
- B. $256,800
- C. $264,000
- D. $270,000
Show answer and explanation →
Answer: B. $256,800
Potential rent is 20 x $1,100 x 12 = $264,000. Subtract 5% vacancy ($13,200) to get $250,800, then add the $6,000 other income for EGI of $256,800. Stopping at $250,800 forgets other income, while $264,000 and $270,000 skip the vacancy deduction.
- A. Incorrect. $264,000 - $13,200 = $250,800 is collected rent after vacancy. It omits the $6,000 laundry and parking income.
- B. Correct. Scheduled rent is 20 × $1,100 × 12 = $264,000. Subtract $13,200 vacancy and add $6,000 other income to get $256,800 EGI.
- C. Incorrect. $264,000 is potential scheduled rent before the 5 percent loss. It also omits other income.
- D. Incorrect. $264,000 + $6,000 = $270,000 adds other income but fails to subtract the $13,200 vacancy and collection loss.
Question 2A property has effective gross income of $148,000, operating expenses of $52,000, and annual mortgage payments of $60,000. What is the net operating income?
- A. $36,000
- B. $88,000
- C. $148,000
- D. $96,000
Show answer and explanation →
Answer: D. $96,000
NOI equals effective gross income minus operating expenses: $148,000 - $52,000 = $96,000. Mortgage payments are debt service and are never subtracted to reach NOI. The $36,000 answer subtracts both expenses and the mortgage, which incorrectly includes debt service.
- A. Incorrect. $148,000 - $52,000 - $60,000 = $36,000 deducts debt service. NOI stops before mortgage payments.
- B. Incorrect. $148,000 - $60,000 = $88,000 deducts mortgage payments while omitting operating expenses. Both choices of deduction are wrong for NOI.
- C. Incorrect. $148,000 is EGI before operating expenses. NOI requires subtracting the stated $52,000.
- D. Correct. $148,000 - $52,000 = $96,000. The $60,000 mortgage payment is debt service, excluded from NOI.
Question 3Which item is subtracted when moving from effective gross income to net operating income?
- A. Vacancy and collection loss
- B. Mortgage principal and interest
- C. Property taxes and insurance
- D. The owner's income tax
Show answer and explanation →
Answer: C. Property taxes and insurance
Operating expenses such as property taxes and insurance are subtracted from EGI to reach NOI. Vacancy loss comes out earlier, when potential gross income becomes EGI. Debt service and the owner's income tax are excluded from NOI entirely.
- A. Incorrect. Vacancy and collection loss is deducted before EGI is reached. Subtracting it again on the way to NOI would double count it.
- B. Incorrect. Mortgage principal and interest are debt service. NOI measures property operations before financing costs.
- C. Correct. Property taxes and property insurance are ordinary operating expenses. They are deducted from EGI to calculate NOI.
- D. Incorrect. The owner's income tax relates to the owner's tax position. It is not a property operating expense in NOI.
Ready to move on?
You have this distinction down when all of these are true.
- Define every compared term without using the other term as the definition.
- Rebuild the comparison table from memory.
- State the decision rule and Georgia distinction without notes.
- Solve the worked example after changing one key fact.
- Explain the rule or fact that makes each distractor wrong.
- Answer all three original questions correctly in mixed practice on a later day.
Recommended next lesson
Continue with Capitalization Rate Versus Gross Rent Multiplier. Once you can reach NOI, Capitalization Rate Versus Gross Rent Multiplier shows how to turn it into a value estimate and why the GRM uses gross rent instead.
Return to the complete exam-concept library or the Valuation and Market Analysis hub.