Net operating income is defined as?

Net operating income (NOI) is a key concept in real estate and mortgage financing, as it represents the revenue generated from a property after deducting all operating expenses. Effective gross income is the total income a property generates, accounting for factors such as vacancies and collection loss, while operating expenses include all costs that are required to operate and maintain the property.

The correct definition of net operating income is derived from taking the effective gross income and subtracting the operating expenses. This calculation provides a clear picture of the income that remains after all necessary costs are covered, which is critical for investors and lenders when assessing the profitability and viability of a property.

In contrast to this, potential gross income represents the total income that could be generated if the property were fully leased, without accounting for vacancies or bad debt. Thus, the subtraction of operating expenses from potential gross income does not accurately reflect the actual income derived from the property.

By focusing on effective gross income rather than potential gross income, the definition acknowledges the real-world conditions that impact revenue. Therefore, the correct answer accurately describes how net operating income is calculated and its relevance to property valuation and investment analysis.