Certified Residential Appraiser Practice Exam

Which term refers to the net income remaining after operating expenses are deducted?

1. Net Operating Income

2. Potential Gross Income

3. Market Rent

4. Flat Rental Lease

The correct answer is: Net Operating Income

The term that refers to the net income remaining after operating expenses are deducted is Net Operating Income (NOI). This financial measure is essential in real estate appraisal and investment analysis because it provides a clear picture of the income generated by a property after accounting for all necessary operating expenses. NOI is calculated by taking the total rental income generated by the property, also known as Potential Gross Income (PGI), and subtracting all operating expenses such as property management fees, property taxes, insurance, and maintenance costs. This figure helps appraisers and investors assess the profitability of an investment property and is a crucial element in determining its overall value. Potential Gross Income represents the total income a property could generate at full occupancy, without accounting for vacancy and collection losses, which is different from NOI. Market Rent is an estimate of the rent a property could command in the current market, while a Flat Rental Lease refers to a rental agreement where the rate remains unchanged for a set period, neither of which directly pertains to the net income after expenses.