Certified Apartment Portfolio Supervisor (CAPS) Practice Exam - Module 2

Which formula is used in the income statement to calculate net operating income (NOI)?

1. Vacancy loss minus operating income

2. GPR less vacancy loss, plus other income equals gross operating income minus operating expenses

3. Total income minus total assets

4. Net income plus expenses

The correct answer is: GPR less vacancy loss, plus other income equals gross operating income minus operating expenses

Net Operating Income (NOI) is an essential figure in real estate management that reflects the profitability of an income-generating property. The correct calculation involves considering the Gross Potential Rent (GPR), which is the total rental income a property could generate if fully occupied. From the GPR, you subtract the vacancy loss, which accounts for the rental income lost when units are not leased. Additionally, other income sources, such as fees or services provided, can be added to arrive at the Gross Operating Income (GOI). From this point, the formula requires subtracting the total operating expenses from the Gross Operating Income. This sequence highlights how NOI serves as a measure of the operating efficiency of a property, minus the non-operational items such as debt service and taxes. This understanding underscores the importance of accurately calculating NOI for assessing property performance, making financial decisions, and maximizing profitability. In contrast, the other options do not correctly depict the calculation for NOI. For instance, calculating total income minus total assets does not pertain to operating performance but involves unrelated financial metrics. Additionally, incorporating net income with expenses fails to consider vacancy loss and operating income elements directly relevant to NOI. These distinctions highlight why the chosen formula is the correct approach for determining Net Operating Income