Net operating income through a clean income waterfall

Short answer: Potential gross income represents full stated income before vacancy. Vacancy and collection loss are subtracted and qualifying other property income is added to reach effective gross income. NOI equals EGI minus allowable property operating expenses under the problem's convention. Standard NOI is before mortgage principal and interest, owner income taxes, accounting or tax depreciation, and investor distributions. Major capital expenditures generally sit outside ordinary NOI, while replacement-reserve treatment follows the stated convention. Use annual NOI with an annual capitalization rate. To find missing expenses, subtract NOI from EGI; to find value, divide stabilized annual NOI by a decimal market cap rate.

Exam NOI problems simplify leases, concessions, expense recoveries, tenant reimbursements, vacancy, management, reserves, capital needs, and stabilization. Actual appraisal, lending, tax, and investment analyses can define and normalize income differently for their purposes. A Schedule E result is not automatically appraisal NOI, and an owner's decision to self-manage does not prove zero market management expense. Concessions may appear as an income reduction, reimbursements may appear as income with a matching expense, and replacement reserves may sit above or below the reported NOI depending on the stated convention. Use the income level, expense definition, reserve policy, period, and capitalization-rate basis stated in the problem. This is exam preparation, not appraisal, banking, tax, accounting, or investment advice. Sources were checked through August 1, 2026.

1. Name the starting income level and annualize every recurring rent and other-income amount.
2. Apply vacancy and collection loss to the exact income base stated in the question, and convert the percentage to a dollar loss before continuing down the waterfall.
3. Add recurring other property income only when it has not already been included in PGI.
4. Total fixed, variable, management, and other operating expenses under the problem's definitions.
5. Apply the stated replacement-reserve convention and keep one-time capital items separate unless directed.
6. Subtract operating expenses from EGI and stop at NOI before debt service, owner tax, and accounting depreciation.
7. Use annual NOI with an annual cap rate or annual debt service and avoid mixing actual, forecast, and stabilized periods.
8. Reverse-check missing expenses or income carefully, preserve every intermediate dollar subtotal, and label the result as property NOI rather than profit, taxable income, or investor cash flow.

These questions are original study items aligned to the published outline. They are not copied, recalled, or predicted PSI questions.

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.

• Review the income approach to value
• Compare gross income and NOI
• Use NOI in capitalization-rate math
• Practice randomized NOI math

• PSI Illinois Candidate Information Booklet dated June 24, 2026
• U.S. Department of Housing and Urban Development, income approach guidance
• Federal banking agencies, current valuation concepts for income-producing real estate
• Office of the Comptroller of the Currency, current Commercial Real Estate Lending handbook
• Fannie Mae Selling Guide B4-1.3-10, current income approach guidance
• Fannie Mae Multifamily Guide, current capitalization-rate guidance
• Internal Revenue Service Topic 414, current rental income and expenses

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.