Twenty units have potential monthly rent of $1,500 each for 12 months. A supported 6% combined vacancy-and-collection allowance already includes the relevant credit loss. A separate credit-risk observation is informational, not an additional deduction. No other income applies. What EGI results?
Correct Answer
C) $338,400
20×1500×12×0.94 = 338400. Common errors: not deducting the 6% allowance gives $360,000; deducting the credit loss a second time gives $318,096; not annualizing the monthly rent gives $28,200.
Why This Is the Correct Answer
Option C is correct because potential gross income is 20 × $1,500 × 12 = $360,000, and deducting the 6% combined allowance gives $360,000 × 0.94 = $338,400. The credit loss is already in the 6%, so no further deduction applies.
Why the Other Options Are Wrong
Option A: $28,200
Option A, $28,200, is wrong because it does not annualize the monthly rent: 20 × $1,500 × 0.94 = $28,200. Multiplying by 12 months first gives 20 × $1,500 × 12 × 0.94 = $338,400.
Option B: $318,096
Option B, $318,096, is wrong because it deducts the credit loss a second time: 20 × $1,500 × 12 × 0.94 × 0.94 = $318,096. The 6% allowance already includes credit loss, so EGI is $360,000 × 0.94 = $338,400.
Option D: $360,000
Option D, $360,000, is wrong because it does not deduct the 6% allowance: 20 × $1,500 × 12 = $360,000. That figure is potential gross income; EGI is $360,000 × 0.94 = $338,400.
Annualize, Then Deduct Once
Multiply units by monthly rent by 12, then take the combined loss off one time.
How to use: Use this sequence for apartment EGI problems with monthly rents.
Exam Tip
Read whether the loss rate is combined; if it already includes collection loss, do not deduct a separate credit loss.
Common Mistakes to Avoid
- -Forgetting to multiply monthly rent by 12
- -Deducting credit loss again when it is already in a combined allowance
- -Reporting potential gross income as EGI
Concept Deep Dive
Analysis
This question tests calculating EGI for a multi-unit property and avoiding a double deduction. Annual potential gross income is units times monthly rent times 12, and the 6% combined allowance already includes credit loss. The separate credit-risk note is informational, so only the 6% is deducted.
Background Knowledge
Potential gross income minus vacancy and collection losses equals effective gross income. A combined vacancy-and-collection allowance covers both lost occupancy and nonpayment, so adding a separate credit loss would count the same risk twice. Income should be stated on an annual basis for most income approach analyses.
Real-World Application
An appraiser values a 20-unit apartment complex with stable monthly rents. Market surveys support a combined vacancy and collection allowance, and the appraiser notes tenant credit concerns in the narrative without taking a second deduction.
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