Certified Residential Appraiser Practice Exam

In real estate, what defines potential gross income?

1. Income after collecting losses

2. The total estimated income from full occupancy

3. Income received after deducting operating expenses

4. The income limit set by rental agreements

The correct answer is: The total estimated income from full occupancy

Potential gross income (PGI) refers to the total income that a property could generate if it were fully rented and occupied at market rates, without any deductions for vacancies or credit losses. This metric is important for appraisers, lenders, and investors as it provides a benchmark for evaluating the revenue-generating capability of an investment property. Option B correctly identifies PGI as the total estimated income from full occupancy. It assumes that all available units or spaces within the property are leased to tenants at the prevailing market rates. This figure is crucial in financial modeling and analysis, as it serves as a starting point for calculating net operating income (NOI), which subsequently factors in vacancy rates and operating expenses to give a more accurate picture of the property’s financial performance. Other options do not accurately represent the concept of potential gross income. For instance, income after collecting losses would not be considered potential gross income, as it accounts for actual income realized rather than the maximum possible income. Income received after deducting operating expenses pertains to net operating income rather than PGI. Lastly, the income limit set by rental agreements emphasizes specific agreements rather than the potential income that could be realized without such limitations.