Annual full-occupancy rent is $120,000. Apply a 5% vacancy and collection loss to rent only. Additional collectible annual laundry income is already effective at $4,800 and receives no further loss deduction. What total EGI results?
Correct Answer
C) $118,800
120000×(1−0.05)+4800 = 118800. Common errors: leaving out the laundry income gives $114,000; applying the 5% loss to the laundry income as well gives $118,560; not deducting the vacancy and collection loss gives $124,800.
Why This Is the Correct Answer
Option C is correct because rent after loss is $120,000 × 0.95 = $114,000, and adding $4,800 of already-effective laundry income gives EGI of $118,800. Effective gross income equals potential income less vacancy and collection loss plus other income.
Why the Other Options Are Wrong
Option A: $114,000
Option A, $114,000, is rent after the 5% loss ($120,000 × 0.95) with the $4,800 laundry income left out. Other income is part of EGI, so the total is $118,800.
Option B: $118,560
Option B, $118,560, comes from applying the 5% loss to both rent and laundry income: ($120,000 + $4,800) × 0.95. The laundry income is already effective, so only rent is reduced, giving $118,800.
Option D: $124,800
Option D, $124,800, adds rent and laundry income ($120,000 + $4,800) without deducting the vacancy and collection loss on rent. After the $6,000 rent loss, EGI is $118,800.
Deduct loss only once
If an income line is already effective, it has taken its loss; add it without deducting again.
How to use: Use this check whenever a problem says some income is already net of loss.
Exam Tip
Read whether each income line is potential or effective before applying a vacancy percentage to it.
Common Mistakes to Avoid
- -Applying the vacancy rate to already-effective other income
- -Leaving other income out of EGI
- -Forgetting to deduct vacancy from rent
Concept Deep Dive
Analysis
This question tests building EGI when only part of the income is subject to vacancy loss. Apply the 5% loss to rent only, then add the laundry income, which is already stated as effective and gets no further deduction.
Background Knowledge
Effective gross income includes rental income after vacancy and collection loss plus other income, such as laundry or parking, that is attributable to the real property. Each income stream should be reduced only by the losses not already reflected in it.
Real-World Application
An appraiser values a fourplex with coin laundry income reported as actual collections. She applies market vacancy to scheduled rents but adds the laundry collections as reported, since they already reflect occupancy.
More Income Approach Questions
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Previous Question
The subject property has annual NOI of $198,000. Debt funds 70% of value at an annual mortgage constant of 9%, and the remaining equity requires an annual equity dividend rate of 12%. What value is indicated using an overall rate from the band of investment, rounded to the nearest dollar?
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An appraiser derives a multiplier from comparables using annual rents, then applies it to the subject's monthly rent. The result is: