Certified Residential Appraiser Practice Exam

What is the portion of net operating income that remains after total mortgage debt service is paid?

1. Reversion

2. Fixed Expenses

3. Variable Expenses

4. Overall Capitalization Rate

The correct answer is: Reversion

The portion of net operating income that remains after total mortgage debt service is paid is known as the reversion. This term refers to the cash flow generated by an investment property after all necessary expenses, including mortgage payments, have been subtracted. Understanding this concept is crucial for appraisers and real estate professionals, as it helps in determining the value of the property based on its ability to generate income. Reversion is particularly significant in the context of investment analysis, where investors are often concerned with the residual income that remains after covering financing obligations. This figure can be a key indicator of profitability and is often analyzed in relation to the overall return on investment. The other terms in the options have distinct meanings that do not relate to this specific financial analysis. Fixed expenses are costs that do not vary with the level of occupancy or business activity, while variable expenses fluctuate based on operational levels. The overall capitalization rate is a measure used to express the relationship between an asset's net operating income and its value, but it does not specifically address the residual income after debt service, which is what reversion signifies.