Question of the Week

An appraiser forms the following estimates for a rental property:

Full Capacity Rental Income
$800,000
Utilities
25,000
Repairs
40,000
Property Insurance
30,000
Property Taxes
27,000
Management Fees
50,000
Capital Expenditure Allowance
22,000
Interest Expense
32,000
Tax Rate
30%
Vacancy and Collection Losses
7%

Which of the following is the correct figure for this property's net operating income?

a) $362,600
b) $518,000
c) $385,000
d) $550,000

Answer:

The correct answer is: d)

Potential Rental Income
800,000
Less: Vacancy and Collection Losses (7%)
56,000
Effective Gross Income
744,000
Less Operating Expenses:
  Utilities
25,000
  Repairs
40,000
  Property Insurance
30,000
  Property Taxes
27,000
  Management Fees
50,000
  Capital Expenditure Allowance  
22,000
Net Operating Income 550,000

"C" is incorrect as taxes are not included in net operating income.