Income-property comparison
Gross income vs. net operating income
Before doing the subtraction, name the income subtotal. Full rental potential, expected collectible income, property operating income and cash after financing answer different questions. A correct number at the wrong level is still the wrong answer.
Last reviewed:
The short answer
For a rental-only starting total, effective gross income equals potential rent minus the stated vacancy and collection loss plus qualifying other income not already counted. NOI then subtracts the operating expenses defined by the problem. Keep mortgage debt service, owner income tax and tax or accounting depreciation outside ordinary property NOI. State the reserve convention. Use annual NOI with a matching capitalization rate, and gross rent with a matching gross rent multiplier.
Reviewed October 25, 2026. PSI places income analysis in national Valuation III.B.4, with related calculations in Domain XI. Valuation has eight of 100 scored national broker questions; that is not a quota for this page. The examples are simplified, hypothetical and governed by their stated definitions. Actual appraisal, underwriting and tax reporting can use different conventions; these calculations do not determine an investment value, loan approval or tax return.
Label the income ladder before calculating
- Name the starting total and requested result. Potential gross income can be defined to include more than rent. In the rental-only examples below, begin with the stated full rent potential; add qualifying other income only when it is separate and not already included.
- Match the period and rent premise. Use the stated unit count, contract or market rent and monthly or annual period. A stabilized forecast is not automatically the same as one month's bank deposits or the current lease-up snapshot.
- Apply the loss allowance once to its stated base. Physical vacancy, uncollectible rent and concessions can be separate components. If a single allowance already covers vacancy and collection loss, do not subtract that loss again under another label. Do not automatically apply a rental-only loss percentage to separate net other income.
- Subtract the specified property operating expenses. Property taxes, property insurance, management, utilities and ordinary repairs are common examples. Separate financing, owner income taxes, depreciation and major capital projects. Check whether the expense subtotal already includes a reserve or management amount.
- State the reserve and cash-flow definitions. The cited Fannie Mae form calls EGI minus operating expenses NOI, then subtracts replacement-reserve capital expenditures to obtain its NCF subtotal before separately listed debt service. Other sources can place reserves inside NOI. The label must travel with its definition.
- Use the correct income level in the next formula. For the specified direct-capitalization exercises, value = annual NOI / the matching rate. For GRM, use the specified gross rent and matching period. A comparable's monthly multiplier is 12 times its annual multiplier when the annual gross-rent base is exactly 12 times that selected monthly base.
- Check the result against the stated inputs. Rebuild the subtotals, reverse the calculation and look for double counting. EGI can exceed a rental-only starting total when other income is large enough. NOI can be negative. Neither name guarantees a positive result or a steadily decreasing sequence at every line.
| Line | Calculation or role | Boundary |
|---|---|---|
| Full potential rent | Unit rents x units x stated period | Before the specified loss allowance |
| Vacancy and collection loss | Deduct the supplied combined allowance once | Use the stated base; do not duplicate concessions already included |
| Separate qualifying other income | Add only what is not already in the starting total | Use the stated net or gross treatment |
| Effective gross income | Potential rent - stated losses + separate other income | Can be a forecast, not only historical receipts |
| Property operating expenses | Deduct specified operating costs | Keep property taxes distinct from owner income taxes |
| NOI under the selected convention | EGI - selected operating expenses | Check whether reserves are already included |
| Replacement reserve / capital allowance | Apply the stated model's treatment once | Not the same as the full actual project payment |
| Mortgage debt service | Below NOI in the simplified owner cash-flow model | Do not subtract it twice |
| Tax or accounting depreciation | Outside ordinary valuation NOI | Separate tax or accounting purpose |
| Cash after stated below-NOI items | Subtract the expressly listed additional items | Not automatically final spendable cash or taxable income |
The distinctions that matter
| Distinction | How it works | What to notice |
|---|---|---|
| PGI and rental-only potential | PGI means the full potential under the selected model. A stated rental-only subtotal may exclude other income that another model already includes. | Read inclusions instead of automatically adding every other-income line. |
| EGI and bank receipts | EGI can be an expected or stabilized collectible-income subtotal. It is not necessarily the exact cash collected in one historical period. | Do not use a tax cash-basis rule to redefine every valuation model. |
| EGI and NOI | EGI is before the selected operating expenses. NOI is after those expenses under the stated convention. | Stop at the income level the question requests. |
| Property tax and owner income tax | Property tax is ordinarily a property operating cost. Owner income tax depends on the taxpayer and is outside ordinary valuation NOI. | The word tax alone does not classify the expense. |
| Operating expense and debt service | Operating expenses support the property's operations. Principal and interest pay the particular financing. | Compute property NOI before subtracting debt service in these examples. |
| Routine repair and capital project | An ordinary recurring repair differs from a major long-lived replacement or improvement. A reserve allowance is different again. | Do not deduct both a supplied reserve and the same full project as annual operating expense. |
| NOI and a named NCF subtotal | The cited Fannie Mae reporting form deducts its replacement-reserve capital-expenditure amount from NOI to obtain NCF. Debt service is separately listed. | NCF does not always mean cash after all mortgage payments. |
| Actual and normalized management expense | An owner may report no paid management fee. A stabilized analysis can still use a supported market cost when that is the assignment premise. | Zero paid is not always zero economic expense. |
| Direct capitalization and GRM | Direct capitalization uses the selected annual NOI and consistent cap rate. GRM uses the specified gross-rent base and period without separately deducting operating expenses. | Do not swap gross and net inputs. |
| Valuation income and taxable rental income | Tax reporting has its own receipt, deduction, depreciation and limitation rules. A tax-return net amount is not automatically valuation NOI. | Reconcile definitions before copying a tax number into a valuation formula. |
Work through the facts
1. Rental potential to property NOI
Annual rental-only potential is $240,000. The combined vacancy and collection allowance is 5% of that rent. Separate qualifying other income is $8,000, and operating expenses are $86,000. These expenses include all deductions required by this example's NOI definition; no additional reserve adjustment applies.
- Loss = $240,000 x 0.05 = $12,000.
- EGI = $240,000 - $12,000 + $8,000 = $236,000.
- NOI = $236,000 - $86,000 = $150,000.
Answer: Annual NOI is $150,000 on the stated expense basis.
2. Other income already included
A different worksheet starts with $248,000 of total potential income, explicitly including the same $8,000 other income. The stipulated loss is $12,000 and the operating expense basis is unchanged at $86,000.
- Do not add the $8,000 again.
- EGI = $248,000 - $12,000 = $236,000; NOI = $150,000.
Answer: Different starting labels can lead to the same result when inclusions are handled consistently.
3. NOI and cash after debt service
EGI is $310,000, selected operating expenses are $115,000 and annual mortgage debt service is $92,000. No reserve, capital payment or other below-NOI item is required for this simplified comparison.
- NOI = $310,000 - $115,000 = $195,000.
- Specified cash after debt service = $195,000 - $92,000 = $103,000.
Answer: NOI is $195,000. The $103,000 is the separate after-debt subtotal, not a final tax result.
4. Depreciation and mortgage interest
EGI is $180,000 and specified operating expenses are $68,000, with no further reserve deduction. The owner also lists $24,000 tax depreciation and $30,000 mortgage interest.
- The financing interest and tax depreciation are not additional operating deductions for this NOI definition.
- NOI = $180,000 - $68,000 = $112,000.
Answer: NOI is $112,000. These facts do not establish final taxable income or whether every tax deduction is allowed.
5. Property taxes and selected operating costs
EGI is $160,000. This exercise defines operating costs as property taxes $16,000, property insurance $4,000, management $8,000, owner-paid utilities $6,000 and ordinary repairs $10,000. A separate $40,000 major roof replacement is capital. No reserve adjustment is stipulated.
- Operating expenses = $16,000 + $4,000 + $8,000 + $6,000 + $10,000 = $44,000.
- NOI = $160,000 - $44,000 = $116,000.
Answer: Use $116,000 NOI. Do not turn the full stated capital project into an additional recurring operating cost.
6. Unpaid owner management
A generic stabilized valuation exercise has EGI of $200,000 and $70,000 of other operating expenses, excluding management and with no further reserve deduction. The owner pays no management fee, but the exercise supplies a supported market management expense of 6% of EGI.
- Normalized management = $200,000 x 0.06 = $12,000.
- Stabilized NOI = $200,000 - $70,000 - $12,000 = $118,000.
Answer: Use $118,000 under this stipulated market-expense model. Six percent is a supplied input, not an Illinois standard or a universal Fannie Mae fee rule.
7. A named reserve and NCF model
Use the cited Fannie Mae form's sequence for this simplified illustration: pre-reserve NOI is $150,000 and the stated replacement-reserve capital-expenditure amount is $8,000. Debt service is separately $90,000. No other cash items apply.
- The named NCF subtotal is $150,000 - $8,000 = $142,000.
- The separate simplified amount after that reserve and debt service is $142,000 - $90,000 = $52,000.
Answer: Its NCF is $142,000 before debt service. The $52,000 is a different subtotal; do not call both numbers the same thing.
8. Monthly NOI and an annual cap rate
The exercise supplies representative monthly NOI of $12,500, with the same expected monthly amount for all 12 months and no further annual adjustment. Apply a matching annual overall cap rate of 7.5%.
- Annual NOI = $12,500 x 12 = $150,000.
- Indicated value = $150,000 / 0.075 = $2,000,000.
Answer: The indicated value is $2,000,000 under the stipulated direct-capitalization assumptions. Do not capitalize one month using an annual income relationship.
9. Monthly and annual GRM
A comparable sells for $360,000 with the specified gross rent of $3,000 per month. The subject's comparable gross-rent basis is $3,200 per month. Use the stated GRM method. For the annual cross-check, assume each monthly rent amount applies unchanged for all 12 months and use the same gross-income definition.
- Monthly GRM = $360,000 / $3,000 = 120; indicated subject value = $3,200 x 120 = $384,000.
- Annual comparable rent is $36,000, so annual GRM is 10. Annual subject rent is $38,400, and $38,400 x 10 also equals $384,000.
Answer: The two consistent period choices agree. Do not use the monthly multiplier with annual rent.
10. Occupied units and lost rent
A current snapshot has ten units. Nine occupied units each rent for $1,000 per month and are fully collected. The one vacant unit has stipulated potential rent of $2,000. No other loss or income applies. This is a snapshot, not a required stabilized vacancy assumption.
- Physical occupancy is 9 / 10 = 90%.
- Full potential monthly rent is $11,000; the vacancy rent loss is $2,000.
- Rent loss is $2,000 / $11,000 = 18.18% rounded to two decimal places, not 10%.
Answer: Unit occupancy and rent-weighted loss use different bases when unit rents differ.
Mistakes to avoid
- EGI always means the bank balance or cash already collected. It can be a forecast under the selected valuation model.
- Every other-income item must be added again. Read whether it is already included in the starting subtotal.
- A combined vacancy/collection allowance needs a second collection deduction. Count each stipulated loss once.
- All taxes are outside NOI. Property taxes and owner income taxes are different items.
- A tax deduction is automatically an operating expense for NOI. Tax reporting and property valuation have different purposes.
- NCF always means cash after mortgage payments. Read the named source's definition and sequence.
- The current owner works for free, so every market analysis uses zero cost. Use supported normalized expenses when the assignment calls for them.
- Income must decline at every single line. Separate other income can increase the subtotal; NOI can also be negative.
- A fully occupied snapshot proves the stabilized allowance is zero. A forecast may still recognize expected turnover, concessions or noncollection.
Check your understanding
These are original teaching questions, not recalled or predicted PSI questions. Answer first, then explain why the other choices fail.
1. Annual rental-only potential is $200,000. A combined vacancy/collection allowance is 5% of that rent. Separate qualifying other income is $10,000. Operating expenses include all required deductions at $70,000; no further reserve adjustment applies. What is NOI?
- $120,000.
- $140,000.
- $130,000.
- $190,000.
Show answer and explanation
Answer: C. $130,000.
Loss is $10,000. EGI is $200,000 - $10,000 + $10,000 = $200,000. NOI is $200,000 - $70,000 = $130,000. Other income was explicitly separate, and the combined loss is deducted once.
2. A total potential-income figure of $248,000 already includes $8,000 other income. The stipulated loss is $12,000. What is EGI?
- $236,000.
- $256,000.
- $248,000.
- $244,000.
Show answer and explanation
Answer: A. $236,000.
EGI is $248,000 - $12,000 = $236,000. Adding $8,000 again would double-count income already in the starting total.
3. Which statement about EGI is most accurate?
- It can be an expected or stabilized collectible-income subtotal before operating expenses.
- It always equals one month's bank receipts.
- It always excludes all other property income.
- It is necessarily income after mortgage debt service.
Show answer and explanation
Answer: A. It can be an expected or stabilized collectible-income subtotal before operating expenses.
The selected model determines whether the figure is historical or forecast. It is not automatically a cash-basis tax number, and it comes before the selected operating expenses.
4. Which item is ordinarily a property operating cost in the stated valuation model?
- The owner's personal income tax.
- Tax depreciation.
- Property taxes.
- Mortgage principal.
Show answer and explanation
Answer: C. Property taxes.
Property taxes are a property-level operating item. Owner income taxes, financing principal and tax or accounting depreciation have different roles and are outside ordinary property NOI.
5. EGI is $180,000 and specified operating expenses are $68,000 with no additional reserve adjustment. The owner also lists tax depreciation $24,000 and mortgage interest $30,000. What is NOI?
- $58,000.
- $82,000.
- $88,000.
- $112,000.
Show answer and explanation
Answer: D. $112,000.
NOI is $180,000 - $68,000 = $112,000. The financing interest and depreciation are not additional operating deductions here. The scenario does not establish final taxable income or eligibility for deductions.
6. NOI is $150,000 and annual debt service is $90,000. No reserve, capital payment or other below-NOI item applies in this simplified exercise. What is cash after debt service?
- $60,000.
- $90,000.
- $150,000.
- $240,000.
Show answer and explanation
Answer: A. $60,000.
The specified subtotal is $150,000 - $90,000 = $60,000. It is not the NOI itself, a final tax amount or a guarantee of spendable cash in a different model.
7. Use the cited Fannie Mae form's sequence. NOI is $150,000, its replacement-reserve capital-expenditure amount is $8,000 and debt service is separately $90,000. What is the form's NCF subtotal before debt service?
- $150,000.
- $142,000.
- $60,000.
- $52,000.
Show answer and explanation
Answer: B. $142,000.
The named NCF is $150,000 - $8,000 = $142,000. The separately calculated amount after the stipulated debt service would be $52,000. A generic cash-flow label cannot substitute for the form's definition.
8. A stabilized exercise has EGI $200,000 and other operating expenses $70,000, excluding management. It stipulates a supported management expense of 6% of EGI and no other reserve deduction. What is NOI?
- $188,000.
- $118,000.
- $130,000.
- $128,000.
Show answer and explanation
Answer: B. $118,000.
Management is $12,000. NOI is $200,000 - $70,000 - $12,000 = $118,000. The 6% is a supplied exercise input, not a statewide or universal lender fee.
9. The stipulated representative monthly NOI is $12,500 for each of 12 months, with no annual adjustment. A matching annual cap rate is 7.5%. What value does the stated method indicate?
- $166,666.67.
- $937,500.
- $2,000,000.
- $1,500,000.
Show answer and explanation
Answer: C. $2,000,000.
Annual NOI is $150,000. Dividing by 0.075 gives $2,000,000. Using one month's NOI with this annual relationship produces a period mismatch. This is an exercise indication, not an actual appraisal.
10. A comparable price is $360,000 and its stated gross rent is $3,000 monthly. The subject has a matching gross-rent basis of $3,200 monthly. What value does the specified monthly GRM indicate?
- $4,608,000.
- $38,400.
- $384,000.
- $360,000.
Show answer and explanation
Answer: C. $384,000.
Monthly GRM is 120; $3,200 x 120 = $384,000. Annual rent requires the annual multiplier of 10, not 120. No separate NOI or operating-expense deduction is part of this stated GRM calculation.
11. EGI is $80,000 and the selected operating expenses are $90,000, including all deductions required by the NOI convention. What is NOI?
- $10,000.
- Negative $10,000.
- Always zero.
- $170,000.
Show answer and explanation
Answer: B. Negative $10,000.
NOI is $80,000 - $90,000 = -$10,000. The name does not guarantee a positive result. A negative selected-year NOI does not automatically prove zero property value or validate simple positive-rate capitalization as the appropriate method.
12. Nine occupied units each produce fully collected monthly rent of $1,000. One vacant unit has potential rent $2,000. No other loss applies. What share of full potential rent is lost, rounded to two decimals?
- 10.00%.
- 18.18%.
- 20.00%.
- 90.00%.
Show answer and explanation
Answer: B. 18.18%.
Full potential is $11,000 and loss is $2,000. $2,000 / $11,000 x 100 = 18.18%. The 90% physical occupancy uses unit count, not rent-weighted potential. This is the given snapshot, not an automatic stabilized allowance.
Common questions
What does gross income mean in a real estate question?
It is an income measure before operating expenses, but that is not a complete label. Identify whether the question supplies full potential, rental-only potential, gross rent or effective gross income, and whether other income is already included. The same word gross can otherwise hide different starting totals.
What is the formula for EGI?
For a rental-only starting total in these examples, EGI equals potential rent minus the stated vacancy and collection loss plus separate qualifying other income. If the starting PGI already includes that other income, do not add it again. Apply the loss allowance to the specified base rather than automatically to every revenue line.
Is EGI the amount actually collected?
Not necessarily. A valuation can use expected or stabilized collectible income, while an actual operating statement describes a particular period. A bank deposit total may also include amounts belonging to another period or money that is not qualifying operating income. Read the model instead of equating every EGI figure with cash receipts.
How do I calculate NOI?
Subtract the operating expenses defined by the question from EGI and apply its reserve convention once. Ordinary property NOI is before mortgage debt service, owner income taxes and tax or accounting depreciation. Name the annual or monthly period before using the result in another formula.
Are property taxes and mortgage interest treated alike?
No. Property taxes are ordinarily property operating costs. Mortgage interest belongs to the owner's financing and is outside ordinary valuation NOI, even though tax reporting can treat eligible interest differently. Owner income tax is also separate from property tax.
Is replacement reserve always inside NOI?
No single convention controls every named model. The cited OCC handbook definition includes replacement reserves in its underwriting NOI. The cited Fannie Mae form calculates NOI before its replacement-reserve capital-expenditure deduction, then calls the resulting subtotal NCF. Follow the problem or named source and keep the chosen cap rate or other ratio consistent with that income definition.
Does NCF always mean cash after debt service?
No. In the cited Fannie Mae form, NCF is NOI less the specified replacement-reserve capital-expenditure amount; debt service is separately listed. Elsewhere, cash-flow labels can be used differently. Write the actual deduction sequence rather than relying on the acronym alone.
Is a major roof replacement an operating expense?
In the stated simplified valuation examples, a major long-lived replacement is a capital item, separate from ordinary annual repairs. A model may also specify a reserve allowance. Do not automatically deduct the full capital payment and the same reserve again in annual NOI. Actual tax capitalization, underwriting and appraisal treatment have their own requirements.
Does free owner management mean zero management expense?
An actual statement may show no fee paid. A stabilized valuation can still include a supported market expense when that is the assignment premise. The supplied 6% example illustrates that distinction; it is not an Illinois commission or management-fee standard, or every lender's prescribed formula.
Should I use contract rent or market rent?
Use the premise stated in the exercise. Actual leases, the property interest being valued, the effective date and market evidence can affect a real analysis. Do not replace every below-market lease with market rent or assume every one-month receipt is a stabilized annual result.
Can I deduct vacancy or concessions twice?
No. A combined allowance may already include collection loss or concessions. Some detailed forms show separate lines. Use the definitions to identify what has already been recognized and subtract each loss once. Current full occupancy does not automatically eliminate a supported forecast allowance.
Do cap rate and GRM use the same income?
No. The specified direct-capitalization exercise uses annual NOI and a consistent cap rate. GRM uses the selected gross rent and a multiplier with the same monthly or annual period. In the example, monthly GRM 120 and annual GRM 10 give the same $384,000 indication when each is paired correctly. The factor-of-12 conversion assumes the annual rent base is twelve times the selected monthly base, as expressly stipulated in the example.
Is Schedule E net income the same as NOI?
No. Tax reporting applies its own receipt, deduction, depreciation and limitation rules. The IRS guidance illustrates that tax depreciation can be relevant there even though it is outside ordinary valuation NOI. Do not copy a tax net amount into a cap-rate problem without reconciling it. This guide does not determine a 2026 tax return, deduction eligibility or tax owed.
Can NOI be negative, or EGI exceed potential rent?
Yes. Expenses can exceed EGI, producing negative NOI. Separate other income can make EGI exceed a rental-only potential-rent subtotal when that income is greater than the stated losses. Those results require interpretation; negative NOI does not automatically mean the real estate has no value, and simple capitalization may not be the appropriate actual valuation method.
Does a refundable security deposit count as rental income?
Do not automatically count collected refundable deposits as operating rent. The cited Fannie Mae form omits security deposits collected from other income but separately identifies forfeited deposits among possible other-income items. IRS guidance also distinguishes refundable deposits from advance rent and other retained amounts for tax purposes. The specific facts and model matter; do not treat every deposit as either current rent or permanently never income.
Are these official PSI questions or a passing-score prediction?
No. These are original exercises aligned with income analysis and calculation topics. They are not live PSI questions, a valuation report or a validated readiness measure. Explain the starting subtotal, loss base, expense classification and result, including when you selected the correct answer by guessing.
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Official sources and scope
Checked October 25, 2026. PSI supplies the correct topic placement. OCC and the named Fannie Mae form demonstrate why income and reserve definitions must be stated. The earlier California DRE teaching reference supports general arithmetic, not Illinois procedure. IRS guidance is used only to distinguish tax reporting and refundable deposits from this valuation model; no 2026 return or deduction eligibility is determined.
- PSI June 24, 2026: national III.B.4 income approach and XI.B.2 capitalization
- OCC Commercial Real Estate Lending handbook: income and value analysis
- California DRE Reference Book chapter 15: overall-rate and income arithmetic
- Fannie Mae Form 4254.DEF: actual and normalized operations, NOI and NCF
- IRS Topic 414: rental receipts and tax-expense distinctions
This is exam preparation, not advice for a specific transaction. State law and the applicable facts control. Our editorial and corrections process explains how to report an issue.