Property Valuation
When calculating potential gross income for a rental property, an appraiser assumes:
AA 5% vacancy rate as required by USPAP
B100% occupancy at market rent✓ Correct
CActual collected rent over the prior year
DRent as negotiated in current leases only
Explanation
Potential gross income (PGI) is calculated assuming 100% occupancy at market rents. Vacancy and collection loss is then subtracted from PGI to arrive at effective gross income (EGI).
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Key Terms to Know
Gross Rent Multiplier (GRM)
A quick valuation metric for income properties calculated by dividing the property price by gross annual rental income.
AppraisalA professional estimate of a property's market value prepared by a licensed or certified appraiser.
Capitalization Rate (Cap Rate)A rate used to estimate the value of income-producing property, calculated as Net Operating Income divided by property value.
Debt-to-Income Ratio (DTI)A lender's measure of a borrower's monthly debt obligations relative to their gross monthly income, used to evaluate loan eligibility.
Math Concepts
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