How is net operating income (NOI) calculated?

How is net operating income (NOI) calculated?

• A. NOI = Gross income - Operating costs
• B. NIO = total income - total expenses
• C. NOI = Revenue - Expenses
• D. NIO = Cash inflows - Cash outflows

Answer: (B)

NOI represents the cash flow a property generates from its regular operations, before financing and taxes. It starts with the income the property actually produces and then subtracts the costs needed to run the property on a day-to-day basis. In practice, you take gross operating income (the income from rents and other property sources after accounting for vacancy and credit losses) and subtract operating expenses such as property management, maintenance, utilities paid by the owner, insurance, and property taxes. Financing costs, depreciation, and taxes are not included in NOI. That’s why the option describing NOI as gross income minus operating costs fits best: it isolates the income from operations and the costs directly tied to running the property. The other formulations mix in items that NOI excludes (like financing and non-operating items) or frame it as a pure cash flow measure, which is not what NOI represents.

NOI represents the cash flow a property generates from its regular operations, before financing and taxes. It starts with the income the property actually produces and then subtracts the costs needed to run the property on a day-to-day basis. In practice, you take gross operating income (the income from rents and other property sources after accounting for vacancy and credit losses) and subtract operating expenses such as property management, maintenance, utilities paid by the owner, insurance, and property taxes. Financing costs, depreciation, and taxes are not included in NOI.

That’s why the option describing NOI as gross income minus operating costs fits best: it isolates the income from operations and the costs directly tied to running the property. The other formulations mix in items that NOI excludes (like financing and non-operating items) or frame it as a pure cash flow measure, which is not what NOI represents.