Certified Residential Appraiser Practice Exam

Which term accurately describes income before accounting for vacancy losses?

1. Net Operating Income

2. Effective Gross Income

3. Potential Gross Income

4. Excess Rent

The correct answer is: Potential Gross Income

The term that accurately describes income before accounting for vacancy losses is Potential Gross Income. This refers to the total income a property could generate if it were fully rented at market rates, without considering any deductions for vacancies or other losses in income. Potential Gross Income serves as a benchmark for evaluating the maximum revenue a property can produce under optimal conditions. It helps appraisers and investors understand the income-generating potential of a property, which can then be adjusted to account for expenses like vacancies and collection losses to determine other important financial metrics such as Effective Gross Income and Net Operating Income. Net Operating Income, on the other hand, reflects the income after all operating expenses are deducted but only after accounting for losses such as vacancies, hence it is not the correct term for income before those losses. Effective Gross Income takes into consideration vacancy rates and other losses, making it a lower figure than Potential Gross Income. Excess Rent is a concept that would be related to income above market rates but does not directly pertain to the overall gross income calculation without adjustments for vacancy and losses.