Certified Residential Appraiser Practice Exam

What is described as the total income from a property at full occupancy before expenses are deducted?

1. Potential Gross Income

2. Effective Gross Income

3. Net Operating Income

4. Market Rent

The correct answer is: Potential Gross Income

The term that refers to the total income from a property at full occupancy before any expenses are deducted is known as Potential Gross Income (PGI). PGI represents the maximum revenue a property could generate under ideal circumstances, assuming all units are leased at their market rental rates. It serves as a crucial starting point in the income approach to property valuation, as it provides the baseline income potential of a property. By distinguishing PGI from other income-related terms, it's clear that Effective Gross Income (EGI) takes into account vacancies and collections losses, reflecting a more realistic income scenario. Net Operating Income (NOI) goes a step further by subtracting operating expenses from EGI to provide the net income generated by the property after necessary expenditures. Market Rent refers to the rental amount that would be agreed upon in an open market transaction but does not directly correlate to the overall income of the property like PGI does. Understanding PGI is essential for appraisers as it lays the groundwork for subsequent calculations and evaluations of a property's financial performance.