A 12-unit building rents at $1,450 per unit monthly with 6% vacancy and collection loss and $7,200 annual parking income. Effective gross income is:
Correct Answer
A) $203,472
Why this is correct: Calculate step-by-step: 1) Potential Gross Income (PGI) from units: 12 units × $1,450/month × 12 months = $208,800. 2) Vacancy & Collection Loss: 6% of $208,800 = $12,528. 3) Net Rental Income: $208,800 - $12,528 = $196,272. 4) Add Other Income (parking): $196,272 + $7,200 = $203,472 Effective Gross Income (EGI). Why the other choices are wrong: '$208,800 before any deduction for vacancy losses' is the PGI, not EGI. '$196,272 excluding the parking income entirely' omits the other income. '$216,000 counting parking at its gross potential' incorrectly adds parking to PGI before applying vacancy. Exam tip: EGI = PGI - Vacancy & Collection Loss + Other Income. Apply vacancy to rental income before adding other stable income.
Why This Is the Correct Answer
Potential gross income from the units is 12 x $1,450 x 12 = $208,800. Vacancy and collection loss at 6 percent is $12,528, leaving $196,272 of collected rental income. Adding the $7,200 of annual parking income produces effective gross income of $203,472. That follows the formula EGI = PGI minus vacancy and collection loss plus other income exactly as written.
Why the Other Options Are Wrong
Option B: $208,800 before any deduction for vacancy losses
$208,800 is potential gross income, the figure you get before any deduction and before any other income. It is the most common wrong answer because it is the first number your calculator produces. Effective gross income by definition must reflect the loss from units that will not be occupied or will not pay.
Option C: $196,272 excluding the parking income entirely
$196,272 correctly nets the 6 percent loss out of rent but then stops, discarding the $7,200 of parking revenue. Other income that is stable and attributable to the real estate belongs in effective gross income; ignoring it understates EGI and therefore the capitalized value. The stem states the parking income as an annual amount specifically so it can be added.
Option D: $216,000 counting parking at its gross potential
$216,000 is $208,800 plus $7,200 with no vacancy deduction at all. It commits two errors at once: it folds parking into the potential gross figure and then skips the 6 percent loss entirely. Even if parking were combined with rent, a loss factor would still have to be applied to something.
Rent Loses, Extras Add
Think of two buckets. The rent bucket leaks by the vacancy percentage. The extras bucket, parking and laundry and fees, is poured in after the leak, not before. Whatever is left in both buckets is effective gross income.
How to use: On any EGI calculation, physically write four lines on scratch paper: PGI, minus vacancy, subtotal, plus other income. Filling in a blank line for the subtotal keeps you from adding parking too early.
Exam Tip
Multiply monthly rent by units and then by twelve in one step; forgetting the twelve is the single most frequent arithmetic slip on apartment income questions.
Common Mistakes to Avoid
- -Reporting potential gross income when the question asks for effective gross income
- -Applying the vacancy rate to other income along with rent
- -Dropping other income out of the calculation entirely
Concept Deep Dive
Analysis
This item drills the sequence of the income statement above the net operating income line. Potential gross income is the rent the property would produce at full occupancy at market rent. Vacancy and collection loss is applied to that rental stream only, because vacancy is a function of units sitting empty. Other income such as parking, laundry, storage or pet fees is then added, in the amount the appraiser considers stable and collectible; it is not run through the unit vacancy factor because it was never part of the unit rent roll. Getting the order wrong changes effective gross income, and every downstream figure with it.
Background Knowledge
You need the standard income statement order: potential gross income, less vacancy and collection loss, plus other income, equals effective gross income, less operating expenses, equals net operating income. You also need to know that other income is added after the vacancy deduction rather than being included in potential gross rent.
Real-World Application
In an apartment appraisal the rent roll drives potential gross income while the owner's operating statement supplies parking and laundry revenue, and the appraiser stabilizes those ancillary lines separately because they do not fluctuate with unit vacancy the same way rent does.
More Income Approach Questions
In a percentage lease, rent is commonly structured as:
In a DCF, what is the reversion?
Potential gross income differs from effective gross income in that PGI assumes:
The reversion in a discounted cash flow model represents:
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An overall rate extracted from a sale whose NOI excluded reserves, applied to a subject NOI that includes them, will:
Replacement reserves cover which kind of expenditure?
What is the primary distinction, for appraisal purposes, between 'vacancy loss' and 'collection loss'?
An appraiser is analyzing a mixed-use property with retail and office components. The retail segment has a potential gross income of $180,000 with a market vacancy of 8%. The office segment has a potential gross income of $120,000 with a market vacancy of 12%. What is the overall effective gross income for the property?
The mortgage constant represents:
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