California Real Estate SalespersonProperty Valuation and Financial AnalysisHard
A 10-unit apartment building has a gross potential rental income of $120,000 per year. The appraiser applies a vacancy and collection loss factor of 5%. What is the Effective Gross Income (EGI)?
- A$114,000
- B$126,000
- C$108,000
- D$118,000
Show answer & explanationAnswer & explanation
Correct answer: A. $114,000
EGI = Gross Potential Income × (1 − Vacancy Rate) = $120,000 × 0.95 = $114,000. This subtracts anticipated income loss from vacancy and non-payment before calculating operating expenses.
Why the other options are wrong
- B. This incorrectly adds the vacancy loss instead of subtracting it.
- C. This would result from applying a 10% vacancy factor instead of 5%.
- D. This is not derived from a 5% vacancy calculation.
Effective Gross Income (EGI)
The gross potential income of a property minus a deduction for vacancy and collection losses, used as a starting point before subtracting operating expenses to find NOI.
- Formula: EGI = Gross Potential Income − Vacancy/Collection Loss
- Comes before calculating Net Operating Income (NOI)
- Vacancy rate reflects expected unrented units and unpaid rent
Memory trick: Potential minus empty units equals effective!