How do you calculate a property's net operating income (NOI) and what does it reflect?

• A. NOI = gross operating income minus operating expenses; excludes debt service, depreciation, taxes; reflects property cash flow.
• B. NOI equals net income after taxes.
• C. NOI is the total rents collected before any expenses.
• D. NOI includes debt service.

Answer: (A)

Net operating income measures what the property can generate from its day-to-day operations. Start with gross operating income, which includes rents and any other income the building produces, and then subtract operating expenses such as property management, maintenance, utilities paid by the owner, insurance, property taxes, and reserves. The result is net operating income, and it does not include debt service (loan payments), depreciation, or income taxes. This figure reflects the property’s operating cash flow available from operations, i.e., the money left after covering operating costs but before financing and tax considerations. It’s the key input for valuing a property using capitalization rates, since it isolates operating performance from financing structure.