Annual PGI is $640,000. Combined vacancy and collection loss is 6.25% of PGI. There is no other income. What EGI remains?
Correct Answer
C) $600,000
640000×0.0625=40000; 640000−40000 = 600000. Common errors: reporting the loss instead of EGI gives $40,000; not deducting the 6.25% loss gives $640,000; misplacing the decimal in the 6.25% loss gives $240,000.
Why This Is the Correct Answer
Option C is correct because the loss is $640,000 × 0.0625 = $40,000, and EGI = $640,000 − $40,000 = $600,000. EGI is potential gross income less vacancy and collection loss.
Why the Other Options Are Wrong
Option A: $40,000
Option A, $40,000, is wrong because it is the vacancy and collection loss itself ($640,000 × 0.0625 = $40,000), not the income remaining. EGI is $640,000 − $40,000 = $600,000.
Option B: $240,000
Option B, $240,000, is wrong because it misplaces the decimal in the 6.25% loss, treating it as 62.5% ($640,000 × (1 − 0.625) = $240,000). Using 0.0625 gives EGI of $600,000.
Option D: $640,000
Option D, $640,000, is wrong because it does not deduct the 6.25% loss and simply restates PGI. EGI after the $40,000 loss is $600,000.
Potential minus loss equals effective
PGI − vacancy and collection loss (+ other income) = EGI.
How to use: Use this whenever a question asks what income remains after vacancy.
Exam Tip
Decide whether the question asks for the loss amount or the income remaining before choosing an answer.
Common Mistakes to Avoid
- -Reporting the loss amount instead of EGI
- -Treating 6.25% as 62.5%
- -Forgetting to deduct vacancy and collection loss
Concept Deep Dive
Analysis
This question tests calculating EGI from PGI with a percentage loss. Multiply PGI by 6.25% to find the loss, then subtract it from PGI. With no other income, the result is EGI.
Background Knowledge
Potential gross income is the total income a property could produce at full occupancy. Effective gross income subtracts an allowance for vacancy and collection loss and adds any other income. EGI is the starting point for deducting operating expenses to reach NOI.
Real-World Application
An appraiser analyzing a suburban fourplex finds market vacancy and collection loss around 6% for similar small rental buildings. The appraiser applies that allowance to the subject's PGI to estimate EGI before deducting expenses.
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Previous Question
A client planning a 24-unit apartment building asks what income the completed property must produce to be worth its $3,325,000 project cost. Overall capitalization rates for similar properties are 8%, operating expense ratios are 30% of EGI, and the vacancy/credit loss allowance is 5% of PGI. What PGI is required?
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