Property Valuation
When appraising an income property in Minnesota, Effective Gross Income (EGI) is calculated as:
APotential Gross Income minus all expenses
BPotential Gross Income minus vacancy and collection losses, plus miscellaneous income✓ Correct
CNet Operating Income plus mortgage payments
DGross rent multiplied by the cap rate
Explanation
EGI = Potential Gross Income (PGI) - Vacancy & Collection Losses + Other Income. EGI represents the actual income the property is expected to generate after accounting for vacancy and non-payment.
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Key Terms to Know
Capitalization Rate (Cap Rate)
A rate used to estimate the value of income-producing property, calculated as Net Operating Income divided by property value.
Net Operating Income (NOI)The annual income generated by an income-producing property after subtracting operating expenses, but before debt service.
Gross Rent Multiplier (GRM)A quick valuation metric for income properties calculated by dividing the property price by gross annual rental income.
Adjustable-Rate Mortgage (ARM)A mortgage with an interest rate that changes periodically based on a financial index, usually after an initial fixed-rate period.
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