Which statement correctly defines net operating income (NOI) in relation to effective gross income (EGI)?

• A. NOI = EGI minus operating expenses.
• B. EGI = potential gross income minus vacancy and credit losses plus other income.
• C. NOI equals gross income minus operating expenses.
• D. EGI equals net operating income plus operating expenses.

Answer: (A)

Net operating income is the amount a property earns from its day-to-day operations after paying operating expenses, starting from effective gross income. Effective gross income already accounts for vacancies and credit losses and includes other income, so subtracting the operating expenses from that figure reveals the income left to the owner after the property’s ongoing operating costs. This focuses on the property's ability to generate income from operations, independent of financing, taxes, or depreciation. Operating expenses include items such as property management, maintenance, utilities paid by the owner, insurance, property taxes, and reserves. Mathematically, NOI can be seen as EGI minus operating expenses; the alternative expression EGI equals NOI plus operating expenses is just a rearrangement of the same relationship, but the direct definition is the subtraction form.