Annual potential rental income is $250,000. Apply a 6% combined vacancy and collection loss to rent only. Other collectible real-estate income is already effective at $8,000, with no further loss. What total annual EGI results?
Correct Answer
C) $243,000
250000×0.94+8000 = 243000. Common errors: leaving out the other income gives $235,000; applying the 6% loss to the other income as well gives $242,520; not deducting the 6% loss gives $258,000.
Why This Is the Correct Answer
Option C is correct because rent after loss is $250,000 × 0.94 = $235,000, and adding the $8,000 of already-effective other income gives $243,000. The loss is applied only to the component the facts say it applies to.
Why the Other Options Are Wrong
Option A: $235,000
Option A, $235,000, is wrong because it leaves out the $8,000 of other income ($250,000 × 0.94 = $235,000). Other collectible real-estate income belongs in EGI, giving $243,000.
Option B: $242,520
Option B, $242,520, is wrong because it applies the 6% loss to the other income as well (($250,000 + $8,000) × 0.94 = $242,520). The other income is already effective, so the correct EGI is $235,000 + $8,000 = $243,000.
Option D: $258,000
Option D, $258,000, is wrong because it does not deduct the 6% loss from rent ($250,000 + $8,000 = $258,000). Deducting the loss gives $235,000 + $8,000 = $243,000.
Haircut only what's potential
Apply the vacancy and collection deduction only to income stated at its potential level; already-effective income is added as is.
How to use: Use this when a problem lists income components with different loss treatment.
Exam Tip
Read which income the loss applies to; questions often specify that some income is already net of its own loss.
Common Mistakes to Avoid
- -Applying the vacancy loss to income already stated as effective
- -Omitting other real-property income from EGI
- -Forgetting to deduct vacancy and collection loss
Concept Deep Dive
Analysis
This question tests building EGI when different income components carry different loss treatment. The 6% vacancy and collection loss applies only to the $250,000 of rent, while the $8,000 of other income is already effective. EGI is the rent after loss plus the other income.
Background Knowledge
Effective gross income is potential gross income less vacancy and collection loss, plus other income from the real property. Losses are applied to the income components they affect. Income already stated on an effective basis should not be reduced again.
Real-World Application
An apartment complex earns rent from units plus laundry income reported on a collected basis. The appraiser deducts a market vacancy and collection allowance from the unit rent only, then adds the laundry income to reach EGI.
More Income Approach Questions
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Previous Question
A property has annual NOI of $82,800. Debt funds 70% of value at an annual mortgage constant of 8%, and the remaining equity has a current annual dividend rate of 12%. What value is indicated using an overall rate from the band of investment, rounded to the nearest dollar?
Next Question
An appraiser is estimating stabilized maintenance expense for a rental house. The owner's records show maintenance costs of $3,000 two years ago, $9,000 last year and $3,600 this year. Last year's figure includes $5,100 to clean up after a burst pipe; the cause was corrected, and no recurrence is expected. Maintenance costs on similar rental houses show no clear trend, and the appraiser concludes to the average annual recurring cost. What is the stabilized annual maintenance expense?