Vacancy, Effective Gross & Operating Expenses

The income approach starts with POTENTIAL gross income (every unit rented at market all year), subtracts vacancy and collection loss, adds other income (laundry, parking) to get EFFECTIVE gross income, then subtracts OPERATING expenses to reach NOI. Operating expenses include taxes, insurance, management, maintenance, utilities, and reserves for replacement — but NEVER debt service, income taxes, or depreciation, the three trick inclusions examiners love. NOI ÷ cap rate = value. If a question sneaks mortgage payments into expenses, strip them out before solving.