What is the formula for net operating income (NOI)?

Net Operating Income (NOI) is a crucial metric in real estate, as it represents the profitability of an income-generating property. The correct formula for NOI is derived from the relationship between effective gross income (EGI) and operating expenses. Specifically, NOI is calculated as EGI minus operating expenses.

Effective gross income is the total income a property is expected to generate, accounting for potential losses such as vacancies and credit issues. By subtracting the operating expenses—which include costs necessary to maintain and manage the property—from EGI, one obtains the NOI. This figure reflects the income available to the property owner after covering the necessary costs of running the property but before financing and tax expenses.

The other options provided do not accurately capture the relationship required to calculate NOI. For instance, the first option, which involves subtracting EGI divided by vacancy/credit loss from operating expenses, doesn’t align with the standard calculation and misuses the components of income and expenses. The third option incorrectly adds vacancy and credit losses into the calculation unnecessarily, while the fourth incorrectly subtracts EGI from operating expenses, suggesting the opposite of the true formula. Recognizing these distinctions is essential for accurately assessing a property's financial performance.