- Official section
- National III.C: Income Approach to Value
- Broker weight
- Part of 8% of the national portion
- Expected scored items
- The current PSI broker outline assigns about 8 of 100 scored national items to Valuation
Income-property comparison
Gross income vs. NOI
Treat income-property math as a waterfall. Start at full earning potential, allow for vacancy and collection loss, add included other property income, and arrive at effective gross income. Then subtract expenses required to operate the property. Stop at NOI before the owner's mortgage, income taxes, or accounting depreciation enter the story.
Last updated: August 1, 2026
What is the difference at a glance?
Short answer: Potential gross income, or PGI, reflects full occupancy and collection under the selected rent assumptions. Effective gross income, or EGI, reflects vacancy and collection loss plus qualifying other income. Net operating income, or NOI, equals EGI minus property operating expenses. NOI is before mortgage debt service, owner income tax, and accounting depreciation. Repairs and routine maintenance are operating expenses; major capital improvements are generally not, while replacement-reserve treatment follows the problem's convention. GRM uses gross rent, whereas direct capitalization uses NOI. Always name the income level before applying a multiplier or rate.
Actual appraisal requires lease analysis, market rent, stabilized vacancy, normalized expenses, property rights, reserve policy, comparable data, and a capitalization rate consistent with the chosen NOI. Taxable rental income, lender underwriting NOI, accounting net income, and appraisal NOI can use different conventions. This guide teaches simplified exam classification and math, not appraisal, banking, tax, accounting, or investment advice. Sources were checked through August 1, 2026.
What changes from one term to the next?
- Terms
- PGI vs. EGI
- Difference
- PGI assumes full occupancy and collection. EGI reflects vacancy and collection loss plus qualifying other income.
- Question cue
- Full potential versus realistic collectible income.
- Terms
- Gross income vs. NOI
- Difference
- Gross income is measured before operating expenses. NOI is the income remaining after allowable property operating expenses.
- Question cue
- Revenue subtotal versus property operating income.
- Terms
- EGI vs. NOI
- Difference
- EGI already reflects occupancy and collection but precedes operating expenses. NOI subtracts those expenses.
- Question cue
- Collected revenue versus post-operation result.
- Terms
- Operating expense vs. debt service
- Difference
- Operating expense supports the real estate's operation. Debt service pays the particular owner's financing.
- Question cue
- Property cost versus capital-structure cost.
- Terms
- Repair vs. capital improvement
- Difference
- A repair keeps the property in ordinary operating condition. A capital improvement adds value, extends life, restores substantially, or adapts the property to a new use.
- Question cue
- Routine operation versus long-lived betterment.
- Terms
- Replacement reserve vs. capital expenditure
- Difference
- A reserve is an annualized allowance used in some analysis conventions. A capital expenditure is the actual cost of a major replacement or improvement.
- Question cue
- Annual allowance versus cash project.
- Terms
- NOI vs. before-tax cash flow
- Difference
- NOI is before financing. Before-tax cash flow is what remains after debt service and other stated below-NOI items.
- Question cue
- Property performance versus equity cash.
- Terms
- NOI vs. taxable rental income
- Difference
- NOI follows valuation or underwriting conventions. Taxable rental income follows tax rules that can include mortgage interest and depreciation deductions.
- Question cue
- Value analysis versus tax reporting.
- Terms
- Cap rate vs. GRM
- Difference
- A cap rate relates NOI to value. A GRM relates gross rent to sale price without explicitly deducting expenses.
- Question cue
- Net-income rate versus gross-rent multiplier.
- Terms
- Actual NOI vs. stabilized NOI
- Difference
- Actual NOI reflects a particular operating period. Stabilized NOI represents expected operation at a normal, sustainable occupancy and expense level.
- Question cue
- Historical snapshot versus market-normal year.
How does the distinction change the answer?
From full rent to NOI
Scenario: An apartment property has annual potential rent of $240,000, other income of $8,000, vacancy and collection loss of 5% of potential rent, and operating expenses of $86,000.
- Vacancy and collection loss is $240,000 times 0.05, or $12,000.
- EGI is $240,000 - $12,000 + $8,000 = $236,000.
- NOI is $236,000 - $86,000 = $150,000.
Answer: The property's annual NOI is $150,000.
Debt service stays below NOI
Scenario: A property has EGI of $310,000, operating expenses of $115,000, and annual mortgage payments of $92,000.
- NOI uses EGI minus operating expenses only.
- NOI is $310,000 - $115,000 = $195,000.
- A simplified before-tax cash flow is $195,000 - $92,000 = $103,000.
Answer: NOI is $195,000, not $103,000; the lower figure is after debt service.
Depreciation does not enter exam NOI
Scenario: EGI is $180,000. Operating expenses are $68,000, tax depreciation is $24,000, and mortgage interest is $30,000.
- The $68,000 represents property operating expenses.
- Tax depreciation and mortgage interest are excluded from appraisal NOI.
- NOI is $180,000 - $68,000 = $112,000.
Answer: The exam NOI is $112,000 under the stated facts.
The owner manages for free
Scenario: A small apartment owner performs all management and records no management expense. Comparable properties pay 6% of EGI for management, and the valuation calls for stabilized market expenses.
- Management is required to operate the property whether the owner writes a check or supplies labor.
- A buyer would consider the economic cost of management.
- Stabilized NOI should include the supported market management expense under the assignment premise.
Answer: Normalize management expense rather than overstating NOI because the current owner works without a recorded fee.
A roof replacement is not routine repair
Scenario: The owner spends $90,000 to replace an entire roof expected to last many years. The problem separately provides ordinary annual repairs and no replacement-reserve instruction.
- The roof replacement is a major long-lived expenditure.
- It is not the same as recurring patching or maintenance.
- Without a stated reserve convention, do not drop the full $90,000 into one year's simplified NOI operating expense.
Answer: Treat the roof as a capital expenditure for this exam setup and use the stated ordinary operating expenses for NOI.
Gross rent belongs with GRM
Scenario: A comparable sold for $360,000 and rents for $3,000 per month. A subject rents for $3,200 per month. The question asks for a value using monthly GRM.
- Comparable monthly GRM is $360,000 divided by $3,000, or 120.
- Subject value is $3,200 times 120, or $384,000.
- NOI and operating expenses are not inputs to this stated GRM problem.
Answer: The indicated value is $384,000.
How do you solve a gross-income-or-NOI question?
- Identify the property, lease assumptions, unit count, rent period, vacancy rate, other income, operating expenses, and required output.
- Name the starting income level: scheduled rent, PGI, EGI, NOI, or after-debt cash flow.
- Annualize rent consistently and calculate PGI under the stated contract or market-rent premise.
- Subtract vacancy and collection loss from the correct base, then add other income only if it is not already included.
- Classify each cost as operating expense, reserve, capital expenditure, debt service, tax, depreciation, or owner-specific item.
- Subtract allowable operating expenses from EGI and stop at NOI before financing and income-tax items.
- Use NOI with a cap rate, gross rent with a GRM, and the same annual or monthly period on both sides of the formula.
- Check that the income waterfall decreases logically, no line appears twice, and the result matches the question's stated convention.
- Line
- Potential gross income
- Formula role
- Full income potential
- Common exam treatment
- Before vacancy and expenses
- Line
- Vacancy and collection loss
- Formula role
- Reduces PGI
- Common exam treatment
- Applied once to stated base
- Line
- Other property income
- Formula role
- Usually added before EGI
- Common exam treatment
- Avoid double counting
- Line
- Effective gross income
- Formula role
- PGI - vacancy + other income
- Common exam treatment
- Before operating expenses
- Line
- Operating expenses
- Formula role
- Reduce EGI
- Common exam treatment
- Taxes, insurance, management, maintenance
- Line
- Net operating income
- Formula role
- EGI - operating expenses
- Common exam treatment
- Before financing and income tax
- Line
- Debt service
- Formula role
- Below NOI
- Common exam treatment
- Reduces cash flow, not NOI
- Line
- Depreciation
- Formula role
- Tax or accounting item
- Common exam treatment
- Excluded from exam NOI
- Line
- Capital improvement
- Formula role
- Separate capital item
- Common exam treatment
- Not routine operating expense
- Line
- Replacement reserve
- Formula role
- Convention-dependent allowance
- Common exam treatment
- Follow stated treatment
Where do similar terms create traps?
- Trap
- Gross income always means the same subtotal.
- Correction
- Name PGI or EGI because one precedes vacancy and the other reflects vacancy and collection loss.
- Trap
- A fully occupied property needs no vacancy allowance.
- Correction
- Stabilized analysis can include market vacancy and collection loss even when occupancy is 100% on one date.
- Trap
- Other income should be added twice if it appears in both rent and an expense statement.
- Correction
- Determine whether the stated PGI already includes the item and count each income source once.
- Trap
- Mortgage principal is an operating expense.
- Correction
- Principal pays owner financing and is below NOI.
- Trap
- Mortgage interest is always deducted for appraisal NOI because tax returns deduct it.
- Correction
- Tax treatment differs; owner financing interest is excluded from standard property NOI.
- Trap
- Depreciation reduces NOI.
- Correction
- Accounting depreciation is excluded from exam NOI even though it can reduce taxable income.
- Trap
- Every owner-performed service has zero economic expense.
- Correction
- A stabilized analysis can include market cost for management or maintenance needed to operate the property.
- Trap
- Every large payment is an operating expense in the year paid.
- Correction
- Separate long-lived capital improvements from recurring operations and follow the reserve convention.
- Trap
- NOI and cash flow after debt service are synonyms.
- Correction
- NOI is before financing; after-debt cash flow subtracts mortgage debt service.
- Trap
- GRM uses NOI because both methods value income property.
- Correction
- GRM uses gross rent; direct capitalization uses NOI.
- Trap
- A higher NOI always proves a better property.
- Correction
- NOI must be evaluated with value, risk, quality, growth, capital needs, property rights, and the method's assumptions.
- Trap
- Monthly income can be divided by an annual cap rate without conversion.
- Correction
- Annualize NOI before using an annual capitalization rate.
Can you separate the terms in a new fact pattern?
These questions are original study items aligned to the published outline. They are not copied, recalled, or predicted PSI questions.
1. A property has PGI of $200,000, 5% vacancy, $10,000 other income, and $70,000 operating expenses. What is NOI?
- $130,000
- $120,000
- $140,000
- $190,000
Show answer and explanation
Answer: $130,000
Vacancy is $10,000, EGI is $200,000, and NOI is $200,000 - $70,000 = $130,000.
2. Which item is excluded from standard appraisal NOI?
- Mortgage debt service
- Property taxes
- Management expense
- Property insurance
Show answer and explanation
Answer: Mortgage debt service
Debt service is owner-specific financing rather than a property operating expense.
3. What is the usual formula for effective gross income?
- PGI - vacancy and collection loss + other income
- NOI + debt service
- Value x GRM
- Sale price - mortgage payoff
Show answer and explanation
Answer: PGI - vacancy and collection loss + other income
EGI reflects collectible property income before operating expenses.
4. Which income should be divided by an overall capitalization rate in direct capitalization?
- Annual NOI
- Monthly gross rent
- Seller net
- Loan proceeds
Show answer and explanation
Answer: Annual NOI
Direct capitalization uses a consistent annual NOI and capitalization rate.
5. A property has NOI of $150,000 and annual debt service of $90,000. What is simplified before-tax cash flow?
- $60,000
- $90,000
- $150,000
- $240,000
Show answer and explanation
Answer: $60,000
$150,000 - $90,000 = $60,000 after debt service.
Where do these ideas appear on the outline?
- Topic
- Income-property purpose
- What to know
- Investor, anticipated benefits, rent, occupancy, lease, market rent, contract rent, property operations, operating expenses, income approach, direct capitalization, yield capitalization, value, risk, return, and market participant
- Best exam move
- Use income analysis when property buyers are primarily motivated by the earning capacity of the real estate.
- Topic
- Potential gross income
- What to know
- PGI, potential gross rent, scheduled rent, full occupancy, full collection, market rent, contract rent, vacant unit at market, annualization, base rent, percentage rent, reimbursement, parking, laundry, storage, signage, and other income convention
- Best exam move
- Build the property's full-income potential before recognizing expected vacancy or collection loss.
- Topic
- Contract rent and market rent
- What to know
- Signed lease, stated rent, concession, escalation, renewal, below-market lease, above-market lease, current market rent, comparable lease, property rights, effective date, stabilized income, vacant space, and assignment premise
- Best exam move
- Use the income premise stated in the problem rather than automatically replacing contract rent with market rent.
- Topic
- Vacancy and collection loss
- What to know
- Physical vacancy, economic vacancy, bad debt, nonpayment, concession, downtime, turnover, lease-up, stabilized allowance, current occupancy, market vacancy, percentage, PGI base, and collected income
- Best exam move
- Subtract the stated vacancy and collection allowance from the correct gross-income base.
- Topic
- Other property income
- What to know
- Parking, laundry, storage, vending, utility reimbursement, pet fee, application income, late fee, antenna, signage, percentage rent, service revenue, recurring, nonrecurring, inclusion, vacancy treatment, and double counting
- Best exam move
- Add only qualifying property income not already included in PGI, using the question's convention.
- Topic
- Effective gross income
- What to know
- EGI, realistic collectible income, PGI, vacancy, collection loss, other income, reimbursement, stabilized operation, annual period, actual income, forecast income, subtotal, and no expense deduction yet
- Best exam move
- Stop at EGI before operating expenses and do not call it NOI.
- Topic
- Operating expenses
- What to know
- Property tax, property insurance, management, utilities, repairs, maintenance, payroll, landscaping, cleaning, security, legal, accounting, supplies, advertising, licenses, administrative expense, owner-provided labor, and normalization
- Best exam move
- Include recurring costs required to operate the property and maintain its income, even when an owner performs work without a check.
- Topic
- Fixed expenses
- What to know
- Property taxes, insurance, license, fixed contract, recurring amount, occupancy independence, annual obligation, reassessment, premium, local charge, owner expense, and property-level cost
- Best exam move
- Fixed does not mean the amount never changes; it means the expense does not move directly with occupancy in the analyzed period.
- Topic
- Variable expenses
- What to know
- Utilities, repairs, maintenance, turnover, cleaning, supplies, payroll, management fee, advertising, snow removal, trash, occupancy, usage, unit count, cost history, market benchmark, and normalization
- Best exam move
- Variable expenses can rise or fall with occupancy, use, and operating activity.
- Topic
- Replacement reserves
- What to know
- Annual allowance, roof, paving, appliances, equipment, short-lived component, future replacement, stabilized expense, appraisal convention, lender convention, actual capital outlay, reserve account, funded amount, unfunded amount, and problem instruction
- Best exam move
- Follow the question's stated reserve treatment rather than applying one convention to every NOI calculation.
- Topic
- NOI formula
- What to know
- Effective gross income, operating expenses, reserve treatment, subtraction, annual property income, stabilized NOI, actual NOI, forecast NOI, numerator, capitalization, value, lender analysis, and before financing
- Best exam move
- Use NOI = EGI - operating expenses, with income and expense periods matched.
- Topic
- NOI exclusions
- What to know
- Mortgage principal, mortgage interest, annual debt service, owner income tax, accounting depreciation, amortization, capital gain, entity overhead, personal expense, distribution, acquisition cost, sale cost, tenant business cost, and owner financing
- Best exam move
- Exclude costs that belong to the owner's capital structure, tax position, accounting allocation, or separate business.
- Topic
- Capital expenditures
- What to know
- Addition, improvement, expansion, structural replacement, new roof, HVAC replacement, renovation, betterment, useful life, capitalization, annual repair, ordinary maintenance, reserve allowance, actual cash outlay, and separate projection
- Best exam move
- Separate routine operating repair from a long-lived capital improvement, then follow any stated reserve convention.
- Topic
- NOI and debt service
- What to know
- Loan principal, loan interest, annual payment, owner leverage, financing terms, before-tax cash flow, debt-service coverage ratio, lender requirement, property NOI, equity return, cash-on-cash return, and refinancing
- Best exam move
- NOI - debt service = before-tax cash flow in a simplified setup; debt service does not help calculate NOI.
- Topic
- Direct capitalization
- What to know
- Value, income, rate, V = I divided by R, stabilized year, overall capitalization rate, annual NOI, market extraction, comparable sale, risk, growth, property rights, period consistency, and going-in rate
- Best exam move
- Use NOI, not gross rent, in the direct-capitalization formula.
- Topic
- Gross rent multiplier
- What to know
- GRM, sale price, monthly rent, annual rent, gross rent, comparable multiplier, subject rent, same period, no explicit expenses, screening measure, expense similarity, vacancy similarity, and limitation
- Best exam move
- Match monthly with monthly or annual with annual and never substitute NOI for the gross-rent input.
- Topic
- Tax and accounting income
- What to know
- Schedule E, rental income, deductible expense, mortgage interest, depreciation, capitalized improvement, cash basis, tax rule, passive activity, accounting net income, book expense, taxable loss, appraisal NOI, and different purpose
- Best exam move
- A tax return can deduct items that appraisal NOI excludes, so do not copy Schedule E net income into a cap-rate problem without reconciliation.
- Topic
- Quality control
- What to know
- Monthly versus annual, percentage base, vacancy twice, other income twice, expense subtotal, negative sign, debt service exclusion, depreciation exclusion, reserve convention, unit count, rent roll, effective date, stabilized figure, rate consistency, and reasonableness
- Best exam move
- Write the income waterfall and label every line before using a calculator.
How do you make the distinction stick?
- Session
- Session 1
- Focus
- Memorize the income waterfall
- Proof you are ready
- Write PGI, vacancy and collection loss, other income, EGI, operating expenses, NOI, debt service, and cash flow from memory five times.
- Session
- Session 2
- Focus
- Classify income and expenses
- Proof you are ready
- Sort 40 rent, reimbursement, operating, financing, tax, depreciation, reserve, and capital items into the correct level.
- Session
- Session 3
- Focus
- Calculate PGI, EGI, and NOI
- Proof you are ready
- Solve 12 unit-rent, annualization, vacancy, collection, other-income, and operating-expense problems.
- Session
- Session 4
- Focus
- Separate NOI from owner cash flow
- Proof you are ready
- Reconcile ten NOI, debt-service, before-tax cash-flow, depreciation, tax, and owner-expense statements.
- Session
- Session 5
- Focus
- Match income to method
- Proof you are ready
- Complete cap-rate, GRM, reserve, monthly-versus-annual, actual-versus-stabilized, and tax-return reconciliation drills.
- Session
- Session 6
- Focus
- Complete a mixed income-property set
- Proof you are ready
- Score at least 90% and explain each answer by income level, expense class, time period, formula, arithmetic, and method consistency.
Do not count recognition as mastery. Close the notes and explain the rule, apply it to a new fact pattern, and identify why each distractor fails.
Turn the comparison into a test-day decision
From concept to decision
Drill this topic, then review the explanation
Pass Illinois gives you original national and Illinois questions, topic-by-topic study, clear explanations, timed practice, flashcards, progress tracking, and Math Coach. Start free, find the weak distinction, and focus the next session there.
Questions students ask about Gross Income vs. NOI
What is gross income in real estate valuation?
Gross income is property income before operating expenses, but the exact level must be named. Potential gross income assumes full occupancy and full collection under the selected rent assumptions. Effective gross income reflects vacancy and collection loss and usually includes qualifying other property income.
What is net operating income?
Net operating income, or NOI, is effective gross income minus allowable property operating expenses and any reserve treatment specified by the problem. It is a property-level measure before mortgage debt service, owner income taxes, and accounting depreciation.
How do you calculate effective gross income?
A common exam sequence is potential gross income minus vacancy and collection loss plus qualifying other income. Some questions include other income in potential gross income already, so use the labels and avoid adding the same income twice.
How do you calculate NOI?
Use NOI = effective gross income - operating expenses. For example, if EGI is $180,000 and operating expenses are $72,000, NOI is $108,000. Apply any replacement-reserve convention stated in the question.
Is mortgage debt service an operating expense?
No. Mortgage principal and interest depend on the owner's financing rather than the property's operations. Debt service is subtracted after NOI when calculating cash flow before taxes, not while deriving property NOI.
Is depreciation deducted when calculating NOI?
No. Accounting or tax depreciation is a noncash allocation and is excluded from the standard real estate valuation NOI calculation. It can matter to taxable income and investment analysis, but it is not a property operating expense for exam NOI.
Are capital improvements operating expenses?
Generally no. A major addition or long-lived improvement is a capital expenditure, not a routine annual operating expense. A valuation may use an annual replacement reserve for short-lived components, depending on the assignment and stated convention. Follow the problem's treatment exactly.
What expenses are commonly included in NOI?
Typical operating expenses include property taxes, property insurance, management, utilities paid by the owner, repairs, maintenance, cleaning, security, payroll, supplies, advertising, licenses, and recurring administrative costs needed to operate and preserve property income.
Why do GRM and capitalization rate use different income?
A gross rent multiplier relates sale price to gross rent and does not explicitly subtract expenses. A capitalization rate relates NOI to value. Using gross income in a cap-rate formula or NOI in a GRM formula mixes measures and produces the wrong answer.
Are these official PSI Illinois real estate exam questions?
No. They are original questions aligned to the national Valuation and Real Estate Math outlines effective June 24, 2026. Appraisal, banking, tax, and Illinois primary sources were reviewed through August 1, 2026.
Primary sources
- PSI Illinois Candidate Information Booklet dated June 24, 2026
- Illinois Department of Financial and Professional Regulation, real estate appraisal
- The Appraisal Foundation, current Uniform Standards of Professional Appraisal Practice
- U.S. Department of Justice, Uniform Appraisal Standards for Federal Land Acquisitions
- Office of the Comptroller of the Currency, Commercial Real Estate Lending handbook
- Internal Revenue Service, current rental income and expense guidance
- Internal Revenue Service, current Schedule E instructions showing tax-income treatment
The current official outline controls the tested scope. Statutes, regulations, and official agency materials control when a general study rule and a jurisdiction-specific rule differ.
Editorial status
Checked against primary sources
The Pass Illinois editorial team last checked this guide on August 1, 2026. Every practice question is an original study item, and the source links above let you verify the rules that support the lesson.