Property Valuation
In the income approach to value, what is 'effective gross income'?
APotential gross income minus vacancy and collection losses✓ Correct
BNet operating income minus debt service
CGross rent multiplied by 12
DTotal income before any deductions
Explanation
Effective gross income (EGI) = Potential Gross Income (PGI) − Vacancy and Collection Losses. It represents the income actually collected, providing a more realistic revenue estimate.
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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.
AppraisalA professional estimate of a property's market value prepared by a licensed or certified appraiser.
Gross Rent Multiplier (GRM)A quick valuation metric for income properties calculated by dividing the property price by gross annual rental income.
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