Potential gross income for an eight-unit building at $1,200 per unit monthly, before any deductions, is:
Correct Answer
A) $115,200 per year at full occupancy
Why this is correct: Potential Gross Income (PGI) is annual income at 100% occupancy: 8 units × $1,200/month × 12 months = $115,200/year. Why the other choices are wrong: $108,300 after typical credit loss is Effective Gross Income, not PGI. $9,600 per calendar month collected is monthly PGI, but the question asks for annual PGI. $96,000 with one unit held vacant deducts vacancy, which is not part of PGI. Exam tip: PGI is the starting point before any vacancy or expense deductions.
Why This Is the Correct Answer
Potential gross income is total rent at full occupancy before deductions: eight units at $1,200 monthly is $9,600 a month, or $115,200 annually.
Why the Other Options Are Wrong
Option B: $108,300 after typical credit loss
Deducting credit loss produces effective gross income, which is the following line rather than potential gross income.
Option C: $9,600 per calendar month collected
$9,600 is the monthly figure. Income statements are stated annually.
Option D: $96,000 with one unit held vacant
Potential gross income is defined at full occupancy, so building in a vacant unit contradicts the definition.
Full Occupancy, Full Year
Full Occupancy, Full Year. Every unit rented, twelve months, nothing taken off yet.
How to use: Build the statement line by line. Each wrong answer here is a different line of the same statement.
Exam Tip
Use market rent rather than contract rent in a stabilised statement, since the model values earning capacity rather than the current lease roll.
Common Mistakes to Avoid
- -Reporting a monthly rather than annual figure
- -Deducting vacancy at the potential gross income line
- -Using contract rents where they differ from market
Concept Deep Dive
Analysis
Potential gross income is the top line of the income statement: the total rent the property would generate at full occupancy, before any deduction for vacancy or collection loss and before operating expenses. Eight units at $1,200 monthly gives $9,600 a month, and twelve months gives $115,200 a year. The distractors correspond to the errors available at this step. Deducting credit loss produces effective gross income, which is the next line rather than this one. Reporting the monthly figure answers a different question, since income statements are annual. And assuming a vacant unit builds an occupancy assumption into a figure defined as being at full occupancy. Note also that the calculation should use market rent rather than contract rent where the two differ, since a stabilised statement values the property's earning capacity — and that other income such as laundry or parking is added after the vacancy deduction rather than at this line.
Background Knowledge
Potential gross income is total rental income at full occupancy at market rents, before vacancy and collection loss. Effective gross income deducts that loss and adds other income; operating expenses are then deducted to reach net operating income.
Real-World Application
An appraiser states $115,200 potential gross income for an eight-unit building, then deducts a 6 percent market loss factor and adds laundry income.
More Income Approach Questions
In a percentage lease, rent is commonly structured as:
In a DCF, what is the reversion?
Potential gross income differs from effective gross income in that PGI assumes:
The reversion in a discounted cash flow model represents:
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The mortgage constant represents:
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