Property Valuation
In the income approach to value, 'effective gross income' is calculated by:
ADeducting operating expenses from potential gross income
BTaking potential gross income and subtracting vacancy and collection losses✓ Correct
CAdding vacancy losses to potential gross income
DDividing net operating income by the cap rate
Explanation
Effective Gross Income (EGI) = Potential Gross Income (PGI) – Vacancy and Collection Losses + Miscellaneous Income. It represents the income the property is actually expected to generate given realistic vacancy rates and collection losses.
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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.
Gross Rent Multiplier (GRM)A quick valuation metric for income properties calculated by dividing the property price by gross annual rental income.
Net Operating Income (NOI)The annual income generated by an income-producing property after subtracting operating expenses, but before debt service.
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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