Podcast
Questions and Answers
Which of the following adjustments transforms Gross Potential Income into Effective Gross Income?
Which of the following adjustments transforms Gross Potential Income into Effective Gross Income?
- Subtracting all operating expenses and debt service.
- Accounting for vacancy and collection losses, and adding other income. (correct)
- Adding capital expenditures and tenant improvement costs.
- Deducting depreciation and amortization expenses.
What is the primary difference between Effective Gross Income and Net Operating Income?
What is the primary difference between Effective Gross Income and Net Operating Income?
- Net Operating Income includes capital expenditures, unlike Effective Gross Income.
- Effective Gross Income is calculated before accounting for operating expenses, which are subtracted to arrive at Net Operating Income. (correct)
- Effective Gross Income includes debt service, while Net Operating Income does not.
- Net Operating Income accounts for all income and expenses, while Effective Gross Income only looks at income.
An investor wants to determine the cash flow a property generates before considering income taxes. Which financial metric should they focus on?
An investor wants to determine the cash flow a property generates before considering income taxes. Which financial metric should they focus on?
- Before Tax Cash Flow (correct)
- Net Operating Income
- Effective Gross Income
- Gross Potential Income
Which expense is typically NOT included in the 'Expenses' category when calculating Net Operating Income?
Which expense is typically NOT included in the 'Expenses' category when calculating Net Operating Income?
A property has a Gross Potential Income of $200,000, vacancy and collection losses of $20,000, and additional income of $5,000. What is the Effective Gross Income?
A property has a Gross Potential Income of $200,000, vacancy and collection losses of $20,000, and additional income of $5,000. What is the Effective Gross Income?
What is the correct order for calculating these measures, starting from the top?
What is the correct order for calculating these measures, starting from the top?
Which of the following best describes the relationship between Net Operating Income (NOI) and Before Tax Cash Flow?
Which of the following best describes the relationship between Net Operating Income (NOI) and Before Tax Cash Flow?
Which of the following scenarios would lead to a higher Effective Gross Income, assuming all other factors remain constant?
Which of the following scenarios would lead to a higher Effective Gross Income, assuming all other factors remain constant?
A property shows a strong Net Operating Income, but a low Before Tax Cash Flow. What could be a likely reason for this discrepancy?
A property shows a strong Net Operating Income, but a low Before Tax Cash Flow. What could be a likely reason for this discrepancy?
If an investor is primarily concerned with the operational efficiency of a property, which metric would be most useful for comparison across different properties, regardless of their financing structures?
If an investor is primarily concerned with the operational efficiency of a property, which metric would be most useful for comparison across different properties, regardless of their financing structures?
Flashcards
Gross Potential Income (GPI)
Gross Potential Income (GPI)
The total potential income a property can generate before accounting for vacancy and collection losses.
Effective Gross Income (EGI)
Effective Gross Income (EGI)
The actual income received after accounting for vacancies and collection losses. Calculated as GPI minus vacancy and credit losses plus other income.
Operating Expenses
Operating Expenses
Operating expenses include costs to maintain the property and does not include debt service or capital expenditures.
Net Operating Income (NOI)
Net Operating Income (NOI)
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Before Tax Cash Flow (BTCF)
Before Tax Cash Flow (BTCF)
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Study Notes
- The order for income and expense statements includes five key categories.
Gross Potential Income
- This is the total potential income a property can generate with 100% occupancy and no losses.
Effective Gross Income
- Calculated by subtracting vacancy and credit losses from the gross potential income.
Expenses
- Includes all operating expenses necessary to maintain the property and generate income.
Net Operating Income
- Determined by subtracting total operating expenses from the effective gross income.
Before Tax Cash Flow
- Represents the cash flow available to the investor before considering income taxes.
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Description
An income and expense statement has five key categories. These categories are gross potential income, effective gross income, expenses, net operating income, and before tax cash flow. Knowing how to use these categories helps with investment decisions.
