In the income capitalization approach, net operating income is derived from which calculation?

The correct answer is derived from understanding how net operating income (NOI) is calculated in the income capitalization approach, a common method used in real estate valuation. Net operating income is defined as the income generated from a property after deducting all operating expenses but before considering financing and tax costs.

In this context, effective gross income refers to the total revenue generated from the property, including any additional income, but after accounting for potential losses such as vacancies and credit losses. Operating expenses are the costs associated with running and maintaining the property, such as property management fees, maintenance, insurance, and taxes.

Thus, when you subtract the operating expenses from the effective gross income, you arrive at the net operating income. This calculation is crucial because NOI provides a clear picture of the property's ability to generate revenue and is a key factor in determining its value through capitalization rates.

The other options do not accurately represent the formula for calculating net operating income. For instance, simply dividing effective gross income by the total number of properties does not account for expenses and is, therefore, not correct. Similarly, potential gross income plus other income aggregates total possible income without factoring in costs. Lastly, dividing potential gross income by expenses misrepresents the relationship between income and costs in the context