Annual potential rent is $480,000. Apply 8% combined loss to rent only. Other collectible real-estate income is already effective at $15,000, with no further loss. What total EGI results? Do not include unrelated business receipts.
Correct Answer
C) $456,600
480000×0.92+15000 = 456600. Common errors: leaving out the other income gives $441,600; applying the 8% loss to the other income as well gives $455,400; not deducting the 8% loss gives $495,000.
Why This Is the Correct Answer
Option C is correct because rent after loss is $480,000 × 0.92 = $441,600, and adding the already-effective $15,000 gives EGI of $456,600. The other income is not reduced again because it is already net of loss.
Why the Other Options Are Wrong
Option A: $441,600
Option A, $441,600, leaves out the other income: $480,000 × 0.92 = $441,600. Adding the $15,000 of collectible real-estate income gives $456,600.
Option B: $455,400
Option B, $455,400, applies the 8% loss to the other income as well: ($480,000 + $15,000) × 0.92 = $455,400. The loss applies to rent only, giving $480,000 × 0.92 + $15,000 = $456,600.
Option D: $495,000
Option D, $495,000, deducts no loss: $480,000 + $15,000 = $495,000. Applying the 8% loss to rent gives $441,600 + $15,000 = $456,600.
Loss only where stated
Apply the vacancy percentage only to the income line the problem names. Income already called effective has had its loss taken.
How to use: Use this to avoid double-counting losses on other income.
Exam Tip
Read which income the loss percentage applies to; the answer often hinges on that phrase.
Common Mistakes to Avoid
- -Applying the loss rate to income already stated as effective
- -Omitting other real-property income
- -Including unrelated business receipts in EGI
Concept Deep Dive
Analysis
This question tests building effective gross income when the loss allowance applies only to rent. The 8% combined loss is deducted from potential rent, and the other income, already stated as effective, is then added without further loss. Care is needed to apply the loss to the right base.
Background Knowledge
Effective gross income is potential gross income less vacancy and collection losses, plus other income from the real property. When other income is already stated on an effective basis, no additional loss is applied to it. Business receipts unrelated to the real estate are excluded.
Real-World Application
An appraiser analyzing a mid-size apartment complex applies a market vacancy and collection rate to scheduled rents, then adds laundry and parking income already reported net of losses to reach EGI.
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?
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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?
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Annual potential rental income is $600,000 and vacancy loss alone is $36,000. What percentage of potential rent does that loss represent?
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