Twelve units have monthly potential rent of $1,450 each for 12 months. Apply 6% combined loss to rental PGI only. Additional parking income is already-effective collectible real-estate income of $7,200 annually and receives no further loss. What EGI results?
Correct Answer
C) $203,472
12×1450×12×0.94+7200 = 203472. Common errors: leaving out the parking income gives $196,272; applying the 6% loss to the parking income as well gives $203,040; not deducting the 6% loss gives $216,000.
Why This Is the Correct Answer
Option C is correct because rental PGI is 12 × $1,450 × 12 = $208,800, rental EGI is $208,800 × 0.94 = $196,272, and adding $7,200 of parking income gives $203,472. The 6% loss applies to rental PGI only. Parking income is already collectible real-estate income and receives no further deduction.
Why the Other Options Are Wrong
Option A: $196,272
Option A, $196,272, is rental income after loss (12 × $1,450 × 12 × 0.94) without the $7,200 parking income. Adding the parking income gives $203,472.
Option B: $203,040
Option B, $203,040, applies the 6% loss to the parking income as well: ($208,800 + $7,200) × 0.94. Parking is already effective, so the correct EGI is $196,272 + $7,200 = $203,472.
Option D: $216,000
Option D, $216,000, adds rental PGI and parking income ($208,800 + $7,200) with no loss deduction. Deducting 6% from rental income gives $203,472.
Units, rent, months, loss
Build rental PGI as units times monthly rent times 12, apply the loss, then add income that is already effective.
How to use: Use this sequence for any apartment EGI calculation with extra income.
Exam Tip
Note which income lines the loss rate covers; additions stated as already effective go in after the deduction.
Common Mistakes to Avoid
- -Applying the vacancy rate to other income already stated as effective
- -Forgetting to annualize monthly rent
- -Omitting other income from EGI
Concept Deep Dive
Analysis
This question tests building rental PGI from unit-level rents and applying a loss only to that rental income. Parking income is already effective, so it is added after the loss. Separating the two income types avoids the distractors.
Background Knowledge
Potential gross income for apartments is the number of units times monthly rent times 12 months. Vacancy and collection loss is deducted to reach effective gross income, and other income already stated at effective amounts is added.
Real-World Application
An appraiser valuing a 12-unit apartment building computes scheduled rent from the rent roll, deducts a market vacancy and collection allowance, and adds parking income based on actual collections.
More Income Approach Questions
Which model describes yield capitalization of property benefits?
An appraiser is valuing a duplex. A market survey of recent duplex sales reports prices at 10.8 times potential gross income, with stabilized vacancy and credit loss of 10% of PGI and no other income. The subject's rent schedule is unavailable, but the property manager's records show collected income of $54,000 a year, in line with market rent and the 10% market loss. What value is indicated?
The subject property is a fourplex with annual EGI of $72,000 and operating expenses of $28,800. Of those expenses, $18,000 is fixed and $10,800 varies in direct proportion to EGI. The owner's annual mortgage payments are $21,000. An appraiser projects that EGI will fall 10% because of higher vacancy. What is the projected NOI?
Annual NOI available for debt service is $168,000 and total annual mortgage principal and interest debt service is $120,000. What is NOI ÷ debt service?
Annual PGI is $250,000 and combined vacancy and collection loss is explicitly 12% of that same PGI base. There is no other income. What annual EGI remains?
Annual PGI is $360,000 and combined vacancy and collection loss is explicitly 8% of that same PGI base. There is no other income. What annual EGI remains?
Annual PGI is $640,000. Combined vacancy and collection loss is 6.25% of PGI. There is no other income. What EGI remains?
An appraiser is updating a prior appraisal of a triplex with potential gross income of $60,000 and no other income. The prior appraisal used vacancy and credit loss of 5% of PGI, and a new survey of competing rentals indicates 8%. The operating expenses of $24,000 are property taxes, insurance and contract services that do not vary with occupancy, and the market overall rate remains 7.5%. By what percentages do effective gross income and indicated value decrease?
Annual potential rental income is $600,000 and vacancy loss alone is $36,000. What percentage of potential rent does that loss represent?
In the subject's market, lenders on fourplexes have lowered their typical loan-to-value ratio from 70% to 60%. The annual mortgage constant remains 5% and the equity dividend rate remains 10%. The subject's NOI has not changed. How does this affect the overall rate indicated by the band of investment and the indicated value?
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Previous Question
An appraiser verifies two fourplex sales, each at an effective gross income multiplier of 8.0. Sale A has an operating expense ratio of 30% of EGI, and Sale B has an operating expense ratio of 45% of EGI. What overall rates do these sales indicate?
Next Question
Lenders in the subject's market are making loans on fourplexes at 70% of value. A typical loan of $350,000 carries 4.5% interest with level monthly payments of $1,750. Investors in these properties expect an 11% first-year cash-on-cash return. What overall capitalization rate is indicated by the band of investment?