What is the exam-ready answer?
| Roadmap post | 239 of 500 |
|---|---|
| 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 |
| Content checked through | August 2, 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 1Potential gross income is $80,000, vacancy loss is $4,000, other income is $1,500, and operating expenses are $27,500. What is NOI?
- A. $48,500
- B. $50,000
- C. $54,000
- D. $77,500
Show answer and explanation →
Answer: B. $50,000
$80,000 - $4,000 + $1,500 - $27,500 = $50,000.
Question 2Which item is normally excluded when calculating NOI for an exam problem?
- A. Property management expense
- B. Routine maintenance
- C. Mortgage debt service
- D. Property insurance
Show answer and explanation →
Answer: C. Mortgage debt service
NOI measures property operations before financing, so mortgage debt service is excluded.
Question 3A property has $72,000 NOI and an 8% cap rate. What is the indicated value?
- A. $5,760
- B. $576,000
- C. $900,000
- D. $5,760,000
Show answer and explanation →
Answer: C. $900,000
Value = NOI / rate = $72,000 / 0.08 = $900,000.
Mastery tracking
Mark this calculation mastered only when every statement is 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. Switch from income relationships to measurement and units.
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