Property Valuation
In the income approach, 'potential gross income' differs from 'effective gross income' because:
APotential gross income includes only commercial tenants
BPotential gross income is the maximum income at full occupancy; effective gross income adjusts for vacancy and collection losses✓ Correct
CEffective gross income includes operating expenses
DPotential gross income is the same as NOI
Explanation
Potential Gross Income (PGI) is the maximum rental income assuming 100% occupancy at market rates. Effective Gross Income (EGI) subtracts vacancy and collection losses from PGI to reflect realistic income expectations.
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Key Terms to Know
Net Operating Income (NOI)
The annual income generated by an income-producing property after subtracting operating expenses, but before debt service.
Capitalization Rate (Cap Rate)A rate used to estimate the value of income-producing property, calculated as Net Operating Income divided by property value.
Gross Rent Multiplier (GRM)A quick valuation metric for income properties calculated by dividing the property price by gross annual rental income.
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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