Effective gross income for a property with $95,000 PGI, 7% vacancy and $3,400 other income is:
Correct Answer
B) $91,750
Why this is correct: Effective Gross Income (EGI) = (Potential Gross Income x (1 - Vacancy Rate)) + Other Income. Calculation: PGI is 95,000. Vacancy loss is 7%, so the collection rate is 93% (100% - 7%). Rent collected = 95,000 * 0.93 = 88,350. Add other income of 3,400: 88,350 + 3,400 = 91,750. Why the other choices are wrong: "$88,350 excluding other income" is the rent collected but not the final EGI. "$98,400 before the vacancy deduction" incorrectly adds other income to PGI before deducting vacancy. "$101,750 adding rather than deducting" incorrectly adds the vacancy amount (95,000 * 0.07 = 6,650) instead of subtracting it. Exam tip: Always apply the vacancy rate to the rent (PGI) first, then add other income.
Why This Is the Correct Answer
Deducting 7 percent vacancy of $6,650 from $95,000 leaves $88,350, and adding $3,400 of other income gives $91,750.
Why the Other Options Are Wrong
Option A: $88,350 excluding other income
$88,350 stops after the vacancy deduction and omits the other income.
Option C: $98,400 before the vacancy deduction
$98,400 adds other income before deducting vacancy, and omits the deduction entirely.
Option D: $101,750 adding rather than deducting
$101,750 adds the vacancy amount rather than subtracting it.
Subtract Vacancy, Then Add Other
Subtract Vacancy, Then Add Other. The loss factor belongs to rent, not to the parking revenue.
How to use: Write the three lines in order every time. The order prevents all four of the errors on offer.
Exam Tip
Other income is not subject to the rental vacancy factor, which is exactly why it is added after the deduction rather than before.
Common Mistakes to Avoid
- -Applying the vacancy factor to other income
- -Omitting other income entirely
- -Adding rather than deducting the vacancy amount
Concept Deep Dive
Analysis
Effective gross income is built in a fixed order: start from potential gross income, deduct vacancy and collection loss, then add other income. Here that gives $95,000 less 7 percent, or $6,650, leaving $88,350, plus $3,400 of other income for $91,750. The order matters and is the source of every wrong answer. Other income comes after the vacancy deduction because vacancy and collection loss is a percentage of rental income — laundry, parking, storage and similar revenue is not subject to the same loss factor and would be understated if the percentage were applied to it. The distractors accordingly stop before adding other income, add other income before deducting vacancy, or add the vacancy figure rather than subtracting it. From effective gross income the analysis continues by deducting operating expenses to reach net operating income, which is what direct capitalization uses.
Background Knowledge
Effective gross income equals potential gross income less vacancy and collection loss plus other income. Operating expenses are then deducted to reach net operating income.
Real-World Application
An appraiser builds effective gross income of $91,750 from $95,000 potential rent, a 7 percent loss factor and $3,400 of laundry and parking income.
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