Texas Property Tax Consultant Practice Exam

How is net operating income calculated?

1. Effective gross income plus all operating expenses

2. Effective gross income less all operating expenses

3. Gross rent multiplied by the number of units

4. Gross income adjusted for vacancies

The correct answer is: Effective gross income less all operating expenses

Net operating income (NOI) is a crucial measure in real estate that reflects the profitability of a property. It is calculated by taking the effective gross income (EGI) generated from the property and subtracting all operating expenses associated with property management and maintenance. Effective gross income represents the total income a property can produce after accounting for vacancies and collection losses. By subtracting operating expenses from EGI, you arrive at the net operating income, which provides insight into how much profit the property is actually generating before financing and tax considerations. This calculation is widely used by property owners, investors, and real estate professionals to assess the financial performance of real estate investments. The other options do not accurately represent the method for calculating net operating income. For instance, adding operating expenses to effective gross income incorrectly inflates the income figure, while simply multiplying gross rent by the number of units fails to consider operating expenses or vacancy rates, leading to an inaccurate understanding of a property's actual income. Similarly, adjusting gross income for vacancies does not complete the picture as it misses out on operating expenses necessary for determining the net operating income.