In the income approach, how is net operating income (NOI) calculated?

The income approach is a method used in real estate appraisal that focuses on the revenue-generating potential of a property. Net Operating Income (NOI) is a crucial metric in this approach, as it reflects the profitability of a property before accounting for financial costs and taxes.

The correct formula for calculating NOI is the difference between Gross Income and Operating Expenses. Gross Income includes all potential income from the property, such as rent from tenants and additional income sources related to the property (like parking fees or service charges). Operating Expenses refer to the costs incurred in maintaining the property and managing operations, including things like property management fees, maintenance costs, property taxes, and insurance.

By subtracting Operating Expenses from Gross Income, you arrive at NOI, which provides a clearer understanding of the property's operational efficiency and its ability to generate revenue. This figure is essential for appraisers and investors alike to assess the potential return on investment and make informed decisions regarding the property's value.

The other options do not accurately reflect how NOI is calculated, emphasizing either irrelevant metrics or incorrect relationships between income and expenses.