How is net operating income calculated?

The calculation of net operating income (NOI) is crucial in assessing the profitability of an income-generating property. NOI is defined as the total income generated from a property minus the operating expenses associated with the property.

The correct approach to determining NOI is to subtract the operating expenses from the gross income generated by the property. This is reflected in the choice that focuses on gross income minus operating expenses. By doing this, you arrive at a figure that represents the income before accounting for financing costs and taxation, which is essential for evaluating the performance and value of a real estate investment.

This concept is foundational in real estate, particularly when evaluating potential investments, as it allows investors to understand potential cash flow and make informed decisions based on property performance. Other choices relate to capitalization rates and market values, which are important in real estate valuation but do not directly pertain to the calculation of net operating income itself.