In the income capitalization approach to appraisal, how is NOI (Net Operating Income) calculated?

In the income capitalization approach to appraisal, the calculation of Net Operating Income (NOI) is fundamental to determining the value of income-producing properties. NOI is considered a key measure of a property's profitability. It is calculated by subtracting total operating expenses from effective gross income (EGI).

Effective gross income represents the total income expected from the property after taking into account loss from vacancies and collection losses. Total operating expenses include all costs necessary for the operation and maintenance of the property, such as property management fees, maintenance costs, property taxes, and insurance.

The formula is thus:

NOI = Effective Gross Income - Total Operating Expenses

This computation gives a clear picture of the income that is actually available from the property after necessary costs have been accounted for. Understanding this calculation is crucial for appraisers, investors, and property managers alike, as it helps assess the property's financial performance and potential return on investment.

The other options do not align with how NOI is defined or calculated in this context. Adding expenses to income or averaging incomes from comparable properties does not accurately reflect the net operating income of a specific property, while multiplying rental income by vacancy rates misrepresents how these factors interact in determining profitability.