5. Which of the following is a method of calculating net operating income when utilizing the direct capitalization appraisal approach?

A. Potential gross income minus vacancy and collection loss minus operating expenses
B. Potential gross income minus vacancy loss minus fixed costs minus income tax
C. Gross income (contract rent) minus vacancy loss minus replacement reserve
D. None of the above

The method of calculating net operating income in the direct capitalization appraisal approach is to subtract vacancy and collection loss and operating expenses from potential gross income.

Explanation:

The method of calculating net operating income when utilizing the direct capitalization appraisal approach is option a: potential gross income minus vacancy and collection loss minus operating expenses.

Net operating income is an important metric in real estate valuation as it represents the income generated by a property after accounting for expenses. Potential gross income refers to the total rental income a property could generate if fully occupied without any vacancy or collection loss. By subtracting the vacancy and collection loss from the potential gross income and then subtracting the operating expenses, we arrive at the net operating income.

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