Which statement defines effective gross income?

Which statement defines effective gross income?

• A. Income after deducting vacancy and credit losses from potential gross income
• B. Income before vacancies and credits are considered
• C. Income representing the seller's original rent roll
• D. Income after deducting operating expenses

Answer: (A)

Effective gross income shows the amount of rental income a property actually expects to collect before operating costs, after accounting for vacancies and credit losses. It starts with potential gross income—the total if every unit is rented and all rents are paid—and then subtracts vacancy losses and anticipated nonpayment (credit losses). The result, before any operating expenses are taken out, is the income base used to measure performance. So, if potential gross income is higher but some units are vacant or tenants don’t pay, those losses reduce the income to the level that is actually expected to be received, which is the effective gross income. Operating expenses come later to arrive at net operating income. The other options describe different measures: one is just the gross income before considering vacancies (potential gross income), and another implies subtracting operating expenses (which yields net income, not effective gross income). The option referencing the seller’s rent roll is not the definition.

Effective gross income shows the amount of rental income a property actually expects to collect before operating costs, after accounting for vacancies and credit losses. It starts with potential gross income—the total if every unit is rented and all rents are paid—and then subtracts vacancy losses and anticipated nonpayment (credit losses). The result, before any operating expenses are taken out, is the income base used to measure performance.

So, if potential gross income is higher but some units are vacant or tenants don’t pay, those losses reduce the income to the level that is actually expected to be received, which is the effective gross income. Operating expenses come later to arrive at net operating income.

The other options describe different measures: one is just the gross income before considering vacancies (potential gross income), and another implies subtracting operating expenses (which yields net income, not effective gross income). The option referencing the seller’s rent roll is not the definition.