If you want to analyze rental properties like a serious investor, you must understand NOI — Net Operating Income. It’s one of the most important numbers in all of real estate investing, yet many beginners misunderstand it or confuse it with cash flow.
NOI is the foundation of:
- Cap rates
- Property valuation
- DSCR loan approvals
- Commercial underwriting
- Portfolio performance tracking
In this guide, we’ll break down exactly what NOI is, how to calculate it, what counts (and doesn’t count) as an operating expense, and why it matters so much in the Arizona market.
What Is NOI? (Simple Definition)
Net Operating Income (NOI) is the amount of income a rental property produces after paying all operating expenses, but before paying the mortgage.
NOI Formula
NOI = Gross Rental Income – Operating Expenses
NOI is a measure of property performance regardless of financing.
If two investors buy the same building — one pays cash, one uses a loan — the NOI is the same.
Why NOI Matters (Especially in Arizona)
A. NOI Determines Property Value
In commercial real estate (5+ units), value is based entirely on:
Value = NOI ÷ Market Cap Rate
A $10,000 change in NOI can increase or decrease value by $150,000–$200,000+ depending on the cap rate.
B. NOI Drives DSCR Loan Approval
Lenders care about whether the property’s income can support the payment.
Stronger NOI → stronger DSCR → easier approval → better rates.
C. NOI Is the Only Way to Compare Two Rentals
Because mortgage terms vary dramatically, NOI lets you compare:
- A Phoenix SFR
- A Tucson triplex
- A Mesa condo
- A Glendale 4-plex
…all on equal footing.
D. NOI Predicts Long-Term Performance
Arizona investors often buy in strong appreciation markets where cash flow is modest. NOI shows:
- the true operating efficiency
- the property’s ability to handle rising expenses
- the long-term income trajectory
What Counts as Operating Expenses? (Very Important)
These ARE included in NOI calculations:
YES — Included
- Property taxes
- Insurance
- HOA dues
- Property management
- Repairs & maintenance
- Landscaping
- Utilities paid by landlord (water, trash, electric if applicable)
- Pest control
- Turnover costs (cleaning, touch-up paint, locks)
- Pool maintenance
- Admin expenses (bookkeeping, software)
What Is Not Included in NOI? (Critical)
These do NOT count as operating expenses:
NO — Not Included
- Mortgage payments
- Principal & interest
- Depreciation
- Capital expenditures (CapEx)
- Large one-time renovations
This is where many beginners get confused.
NOI is before debt service — it’s the property’s operating performance alone.
How to Calculate NOI Step-by-Step
Example: Tucson Triplex Near U of A Medical District
Gross Rental Income
- 3 units × $1,250/mo = $3,750/mo
- Annual: $45,000
Operating Expenses
- Taxes: $2,900
- Insurance: $2,300
- Repairs/Maintenance: $2,200
- CapEx Reserve (not in NOI): excluded
- Property management (8%): $3,600
- Water/Sewer/Trash: $2,400
- Landscaping: $1,200
- Vacancy (5%): $2,250
- Total Operating Expenses: $16,850
NOI = 45,000 – 16,850 = $28,150
This is the true income picture the lender and buyer will use.
How NOI Affects Value (Cap Rate Example)
Using the example above:
If Tucson triplex cap rates are around 6.2%:
Value = NOI ÷ Cap Rate
$28,150 ÷ 0.062 = $454,032
You can now estimate what the property is worth in the current market.
This is why improving NOI increases value dramatically.
How Investors Improve NOI (Value-Add Examples)
Increasing NOI is the fastest way to build wealth in real estate.
Increase Income
- Add in-unit laundry
- Add covered parking or storage
- Install RUBS (utility bill-back system)
- Add pet rent
- Improve units → raise market rent
- Add a fenced yard (high demand in Phoenix)
Reduce Expenses
- Appeal property taxes after reassessment
- Switch to lower-cost landscaping
- Lower insurance with better coverage structure
- Improve tenant screening → reduce turnover
- Replace old A/C units (big long-term expense reducer)
Even a small change can make a big difference:
Example:
Improving NOI by just $2,000 per year at a 6% cap rate adds:
$2,000 ÷ 0.06 = $33,333 in property value
Why NOI Is So Important in Arizona (Current Market Reality)
Arizona is a market where:
- Insurance has risen significantly
- Property taxes adjust quickly after sales
- Rents remain strong but competitive
- Many SFRs produce modest cash flow
- Small multifamily is in high demand
- DSCR lending is extremely common
NOI gives investors a clean, unbiased way to evaluate:
- operating risk
- stability
- genuine income potential
- financing strength
- long-term performance
It keeps decisions objective in a fast-moving market.
Final Thoughts
Once you understand NOI, you unlock the ability to:
- value properties correctly
- compare different deals
- underwrite like a professional
- avoid “cash flow trap” properties
- pursue safe, long-term Arizona investments
NOI is the backbone of real estate analysis. Master this metric, and every other investor tool becomes easier.
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