What is net operating income (NOI) calculated by?

Net operating income (NOI) is a key metric in real estate that measures a property's ability to generate income from operations, focusing specifically on its revenue and operating costs. It is calculated by taking the total gross revenues from the property and subtracting only the operating expenses, which can include property management fees, maintenance costs, property taxes, insurance, and other necessary expenses directly related to the operation of the property.

The correct answer highlights that NOI represents the cash remaining after all operating expenses are deducted, which provides a clearer picture of how well the property performs financially before considering debt service and financing costs. This is crucial for investor analysis since NOI is often used to determine property value and is foundational in calculating various performance ratios, such as the capitalization rate.

In contrast to other options, while gross revenues and monthly rental amounts are important components of a property's income stream, they do not account for the necessary operating expenses that are deducted in calculating NOI. Including all liabilities instead of just operating expenses would skew the measurement, as NOI focuses solely on operational performance and does not incorporate financial liabilities or expectations of losses. Thus, understanding and calculating NOI accurately allows investors and property managers to assess the profitability of their real estate investments effectively.