Which statement best defines Net Operating Income (NOI)?

Which statement best defines Net Operating Income (NOI)?

• A. NOI = Effective Gross Income minus Operating Expenses (excluding debt service and depreciation)
• B. NOI = Gross Income minus Operating Expenses including debt service
• C. NOI = Net Operating Income plus Depreciation
• D. NOI = Purchase Price minus taxes

Answer: (A)

Net Operating Income focuses on what the property can generate from its operations, independent of financing or taxes. It measures cash flow available from the property after paying operating costs, using Effective Gross Income (which accounts for vacancies and other income) and subtracting operating expenses (such as management, maintenance, utilities, insurance, and property taxes). Debt service and depreciation are not part of NOI, because debt service is a financing cost and depreciation is a non-cash accounting expense. So the correct definition is Effective Gross Income minus Operating Expenses, excluding debt service and depreciation. For example, if EGI is 150,000 and operating expenses total 60,000, NOI is 90,000.

Net Operating Income focuses on what the property can generate from its operations, independent of financing or taxes. It measures cash flow available from the property after paying operating costs, using Effective Gross Income (which accounts for vacancies and other income) and subtracting operating expenses (such as management, maintenance, utilities, insurance, and property taxes). Debt service and depreciation are not part of NOI, because debt service is a financing cost and depreciation is a non-cash accounting expense. So the correct definition is Effective Gross Income minus Operating Expenses, excluding debt service and depreciation. For example, if EGI is 150,000 and operating expenses total 60,000, NOI is 90,000.