- CFA Exams
- CFA Level I Exam
- Study Session 15. Alternative Investments
- Reading 39. Private Real Estate Investments
- Subject 4. The income valuation approach

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**CFA Practice Question**

Gold Coast Apartments, a 160-unit complex, has 100 one-bedroom and 60 two-bedroom apartments, which rent for $700 and $900 per month, respectively. The complex earns $22,000 per year from its laundry facilities. The following data is available:

Vacancy and collection losses are 6% of effective gross potential income,

Annual property insurance and taxes amount to $154,000

Average annual costs of repairs, utilities, garbage and management are $209,000

The property was purchased for $5.10 million. The annual mortgage payment for the property (20-year, 9% mortgage on 80% of the property value) is $440,526. What is Gold Coast' net operating income?

Vacancy and collection losses are 6% of effective gross potential income,

Annual property insurance and taxes amount to $154,000

Average annual costs of repairs, utilities, garbage and management are $209,000

The property was purchased for $5.10 million. The annual mortgage payment for the property (20-year, 9% mortgage on 80% of the property value) is $440,526. What is Gold Coast' net operating income?

A. $615,871

B. $689,200

C. $1,056,400.

**Explanation:**Mortgage payments and interest expenses depend upon the financing choice of the investor, not operations. Therefore, these costs are not considered in the net operating income (NOI) computations. Net operating income can be calculated as follows:

Gross Rents 1,488,000

Other Income 22,000

Gross potential income 1,510,000

Less Vacancy losses at 6% -90,600

Effective gross income 1,419,400

Operating expenses

Property insurance and taxes -154,000

Management and other expenses -209,000

Net operating income 1,056,400

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**User Contributed Comments**
7

User |
Comment |
---|---|

achu |
NOI excludes interest, income taxes, and financing items like a mortgage! |

bhuman |
NOI does include taxes actually. And be careful. If you are given the marginal tax rate, and not a $ number for the actual amount of taxes due, you will need to subtract interest from Gross income to calculate the total taxes. |

lavalyn |
NOI includes property taxes, but not income taxes. Income taxes are dependent on interest charges. |

shiva5555 |
This test blows goats. I have proof. |

johntan1979 |
Stop over my place... I have a lot of goats for you to blow. |

birdperson |
what?! |

thebkr777 |
^Well this took a turn |