What is the exam-ready answer?
| Official syllabus topic | Valuation and XI.B.2 General Concepts: income approach, rate of return, and capitalization rate |
|---|---|
| Official PSI area | Real Estate Calculations |
| Published weight | 7% of the 100-question 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 calculation. Follow the stated facts, units, time basis, and rounding instruction.
Formula and variables
| Symbol or term | Meaning |
|---|---|
| Effective gross income | Collected rental and other property income after vacancy and collection loss |
| Operating expenses | Ordinary recurring costs of operating the property, excluding financing and owner-specific items |
| NOI | Property income before debt service, depreciation, capital expenditures, and income taxes |
Step-by-step method
- Put every income and expense amount on the same annual or monthly period.
- Find effective gross income by adjusting potential income for vacancy and other property income.
- Classify ordinary operating expenses separately from financing, depreciation, capital improvements, and owner income taxes.
- Subtract only operating expenses to reach NOI.
- Use the resulting NOI in the IRV formula if the question then asks for cap rate or value.
Georgia-specific distinction
Worked examples
Example 1: Annual NOI from a full income statement
Scenario. Potential rent is $96,000, vacancy loss is $4,800, laundry income is $2,400, and operating expenses are $31,600.
- Effective gross income = $96,000 - $4,800 + $2,400 = $93,600.
- NOI = $93,600 - $31,600 = $62,000.
Answer. Annual NOI is $62,000.
Reasonableness check. NOI is below effective gross income by exactly the operating expenses.
Example 2: Remove non-operating items
Scenario. Effective gross income is $120,000. Listed costs are $24,000 maintenance and utilities, $18,000 mortgage payments, $6,000 depreciation, and $8,000 property management.
- Operating expenses are $24,000 + $8,000 = $32,000.
- Mortgage payments and depreciation are excluded from NOI.
- NOI = $120,000 - $32,000 = $88,000.
Answer. Annual NOI is $88,000.
Reasonableness check. Financing and accounting deductions do not change the property's operating income.
Common exam traps
- Subtracting mortgage principal and interest as operating expenses
- Subtracting depreciation or owner income tax
- Forgetting to deduct vacancy and collection loss
- Mixing monthly income with annual expenses
Original practice questions with detailed explanations
These original instructional questions map to the July 1, 2026 PSI outline. They are not copied from PSI or any live examination. Write the setup before opening the explanation.
Question 1A 12-unit building rents for $1,100 per unit a month. Vacancy and collection loss is 5% of potential rent, laundry brings $3,600 a year, operating expenses are $52,000 a year, and debt service is $40,000 a year. What is annual NOI?
- A. $62,080
- B. $98,480
- C. $102,080
- D. $110,000
Show answer and explanation →
Answer: C. $102,080
Potential rent is $158,400, less 5% vacancy is $150,480, plus laundry is $154,080, less operating expenses is $102,080. $62,080 also subtracts debt service, which is a financing cost outside NOI. $110,000 forgets the vacancy loss.
Question 2Effective gross income is $210,000. Costs are property taxes $18,000, insurance $6,000, maintenance $22,000, management $12,600, mortgage interest $48,000, depreciation $15,000, and a new roof $30,000. What is NOI?
- A. $88,400
- B. $103,400
- C. $121,400
- D. $151,400
Show answer and explanation →
Answer: D. $151,400
Operating expenses are taxes, insurance, maintenance, and management, $58,600 in all, so NOI is $151,400. $103,400 subtracts mortgage interest, which is a financing cost. $121,400 subtracts the roof, a capital expenditure rather than an operating expense.
Question 3A building collects $9,000 a month in potential rent. Vacancy is 4%, annual operating expenses are $38,000, and the market cap rate is 8%. What value is indicated?
- A. $821,000
- B. $875,000
- C. $1,296,000
- D. $1,350,000
Show answer and explanation →
Answer: A. $821,000
Effective gross income is $108,000 x 0.96 = $103,680, NOI is $65,680, and $65,680 / 0.08 = $821,000. $875,000 skips the vacancy loss. $1,296,000 capitalizes effective gross income before subtracting operating expenses.
Ready to move on?
You have this calculation down when all of these are true.
- I can move from potential income to effective gross income.
- I can classify operating and non-operating expenses.
- I exclude debt service, depreciation, and capital expenditures from NOI.
- I keep all figures on the same time period.
- I can carry NOI into a cap-rate or value calculation.
Recommended next lesson
Continue with Area, Perimeter, Square Footage, and Acreage. With income math done, the next lesson changes to measurement: square footage, triangles, and converting to acres at 43,560 square feet each.
Return to the complete calculation hub, formula sheet, or mixed math drill.