A building's rent roll totals $120,000 at full occupancy. Vacancy and collection loss is 5% and laundry income adds $4,800. What is effective gross income?
Correct Answer
D) $118,800, after the loss and with the other income
Why this is correct: Effective Gross Income (EGI) = Potential Gross Income (PGI) - Vacancy & Collection Loss + Other Income. PGI from rent is $120,000. Vacancy loss is 5% of $120,000 = $6,000. Net rental income is $120,000 - $6,000 = $114,000. Add other income (laundry) of $4,800: $114,000 + $4,800 = $118,800. Why the other choices are wrong: $114,000 subtracts vacancy but omits other income. $124,800 adds other income but ignores vacancy. $120,000 uses full rent roll without accounting for typical vacancy or other income. Exam tip: EGI formula: PGI - Vacancy + Other Income. Do the steps in order.
Why This Is the Correct Answer
The rent roll of $120,000 at full occupancy is potential gross income. Vacancy and collection loss at 5 percent removes $6,000, leaving $114,000 of collected rent. Adding the $4,800 of laundry income produces effective gross income of $118,800, which uses every figure in the stem exactly once and in the correct order.
Why the Other Options Are Wrong
Option A: $114,000, the rent roll less the vacancy loss
$114,000 correctly deducts the 5 percent loss but never adds the $4,800 of laundry income. Ancillary revenue that is stable and attributable to the property belongs in effective gross income, and omitting it understates both EGI and any value derived from it. The number is right at the halfway point, which is what makes it dangerous.
Option B: $124,800, the rent roll plus the other income
$124,800 adds the laundry income to the full rent roll without any vacancy deduction. Skipping the loss factor treats the building as permanently 100 percent occupied and fully collecting, which no income property analysis assumes. The deduction must come out before other income goes in.
Option C: $120,000, since the building is currently full
$120,000 is the rent roll at full occupancy, which is potential gross income by definition. Current full occupancy is a snapshot, and a stabilized estimate must reflect typical turnover and collection risk over the holding period. This option also discards the laundry income entirely.
Minus Then Plus
Rent goes down before extras go up. Subtract the leak from the rent bucket first, then pour in laundry, parking and fees. Reverse the order and every figure downstream is wrong.
How to use: Write four labeled lines before computing: PGI, vacancy, subtotal, other income. Any option matching one of the intermediate lines rather than the final total is a distractor.
Exam Tip
Never let a phrase like 'at full occupancy' or 'currently full' tempt you into skipping the vacancy deduction on a stabilized estimate.
Common Mistakes to Avoid
- -Omitting other income from effective gross income
- -Skipping the vacancy deduction when the building is fully occupied
- -Adding other income before applying the vacancy factor
Concept Deep Dive
Analysis
Effective gross income is the second line of the reconstructed operating statement and it has exactly three moving parts in the right order. Potential gross income is total rent at full occupancy at market rates. Vacancy and collection loss is subtracted from that rental figure because it measures units that stand empty or tenants who fail to pay. Other income, here laundry revenue, is then added, since it is ancillary revenue tied to the property that was never part of the rent roll and is not directly reduced by unit vacancy. Each of the three distractors in this item omits or misplaces exactly one of those steps, which is how the exam checks whether you know the sequence rather than just the words.
Background Knowledge
You need the reconstructed operating statement sequence: potential gross income, minus vacancy and collection loss, plus other income, equals effective gross income. You also need to know that other income such as laundry, parking and storage is added after the vacancy deduction rather than being folded into potential gross rent.
Real-World Application
Reconstructing an apartment operating statement, the appraiser takes rent potential from the rent roll, applies a submarket vacancy and collection allowance, then adds stabilized laundry and pet-fee revenue from the owner's income detail to arrive at effective gross income.
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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