In the income capitalization approach, how is NOI calculated?

In the income capitalization approach, calculating Net Operating Income (NOI) is a crucial step that reflects the income-generating potential of a property. This calculation involves understanding the relationship between the property's income and expenses.

The correct method for calculating NOI is by determining the effective gross income and then subtracting the total operating expenses associated with the property. Effective gross income represents the potential income from the property after accounting for expected vacancies and collection losses. By using effective gross income as the starting point, you ensure that the income figure realistically reflects what the property actually earns.

Subtracting total operating expenses from effective gross income provides a clear and accurate picture of the profitability of the property. Total operating expenses include costs necessary to maintain and operate the property, such as property management fees, maintenance costs, property taxes, utilities, and insurance.

In this context, other potential methods mentioned would not yield a proper calculation of NOI. Reconstructing the operating statement is an important process but does not directly result in the NOI figure itself. Simply subtracting operating expenses from property value does not take into account the income generated, which is critical for appraisal purposes. Lastly, while subtracting vacancy and collection losses from effective gross income is a necessary step to arrive at effective gross income, it