Annual PGI is $480,000 and combined vacancy and collection loss is 8% of PGI. No other income applies. What EGI results?
Correct Answer
B) $441,600
480000×0.08=38400; 480000−38400 = 441600. Common errors: reporting the loss instead of EGI gives $38,400; not deducting the 8% loss gives $480,000; dividing by 1.08 instead of multiplying by 0.92 gives $444,444.
Why This Is the Correct Answer
Option B is correct because the loss is $480,000 × 0.08 = $38,400, and EGI is $480,000 − $38,400 = $441,600. Equivalently, $480,000 × 0.92 = $441,600.
Why the Other Options Are Wrong
Option A: $38,400
Option A, $38,400, is wrong because it reports the loss instead of EGI: $480,000 × 0.08 = $38,400. EGI is PGI minus that loss, $480,000 − $38,400 = $441,600.
Option C: $444,444
Option C, $444,444, is wrong because it divides by 1.08 instead of multiplying by 0.92: $480,000 ÷ 1.08 = $444,444. Since the loss is 8% of PGI, EGI is $480,000 × 0.92 = $441,600.
Option D: $480,000
Option D, $480,000, is wrong because it does not deduct the 8% loss. That figure is PGI; EGI is $480,000 − $38,400 = $441,600.
Keep 92 of 100
An 8% loss means you keep 92 cents of every potential dollar, so multiply PGI by 0.92.
How to use: Use this complement shortcut to convert any loss percentage into a single multiplication.
Exam Tip
When a loss is a percentage of PGI, multiply by one minus the rate; dividing by one plus the rate gives a slightly wrong answer.
Common Mistakes to Avoid
- -Reporting the vacancy loss amount as EGI
- -Dividing by 1 plus the loss rate instead of multiplying by 1 minus the rate
- -Skipping the vacancy and collection deduction
Concept Deep Dive
Analysis
This question tests the basic step from potential gross income to effective gross income. The loss is 8% of PGI, so the loss amount is subtracted from PGI, or PGI is multiplied by 0.92. Errors come from reporting the loss itself, skipping it, or dividing by 1.08.
Background Knowledge
Potential gross income minus vacancy and collection losses equals effective gross income. A loss stated as a percentage of PGI is applied by multiplying PGI by that percentage and subtracting the result. NOI is then found by deducting operating expenses from EGI.
Real-World Application
An appraiser valuing a fourplex applies a market-supported combined vacancy and collection rate to the projected potential gross income. The resulting EGI is the starting point for deducting operating expenses.
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An appraiser has a rent roll for a fourplex that indicates potential gross income of $70,000, but no expense data. A similar fourplex recently sold for $450,000. That sale had potential gross income of $62,500, effective gross income of $56,250 and NOI of $36,000. What is the indicated value of the subject?
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