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Can someone help me with a concept?

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Allied

Freshman Member
Joined
Jan 28, 2008
Professional Status
Appraiser Trainee
State
California
Effective Gross Income. To find it, say for example a 40-unit apartment building, we would take the potential gross income from rent, add in income from laundry rooms and any other sources and subtract a vacancy rate right?

My question is this: Why would we subtract a vacancy rate from alternative income? Can we apply the same vacancy rate, to say, the laundry rooms and pay phones as we do with rents? Technically the laundry room isn’t vacant and who is to say that every resident uses the laundry room. When I was younger I would take my laundry back home to my parents house (it was the only time a bachelor like me got to eat a hot meal).

I guess it makes sense that if there is a 10% vacancy rate in rent then those washers will get 10% less use. But a vacancy rate (at least to my understanding) can also apply to things that are not just vacancies. It can apply to collection losses as well from deadbeat tenants. If that is the case then it is possible for the laundry room to get 100% use even though the landlord is not receiving 100% of the rents.

So wouldn’t it make more sense to calculate the effective gross income in the following way:

Potential Rent – Vacancy & collection loss + alternative income = EGI

Thanks in advance for your help.
 

KD247

Senior Member
Joined
Jan 24, 2002
Professional Status
Certified Residential Appraiser
State
California
In determining market value, the most important concern is that we analyze properties the same way the market does. If local investors typically consider a separate factor for additional income sources, you should follow their lead. If local investors consider value projections, potential external obsolescence, and/or other factors in their analysis, then you should too.

We are usually trying to estimate what a property would actually sell for, not what it ought to sell for. If your analysis is more precise or more logically correct than the analysis of the typical local buyer, you run the risk of mis-valuing the property or implying a greater degree of accuracy than actually exists.

If the client requires that you analyze income in another specific and completely different way, you should perform your best market analysis and then do a separate analysis that fulfills the client's requirement.
 

lizhorvath

Member
Joined
Dec 11, 2003
Professional Status
Licensed Appraiser
State
Michigan
Here's the formula - don't think too hard about what you've been doing before.

Potential Gross Income - Vacancy & Rent Loss + Mischellanseous Income (your coin operated income, for example) = Effective Gross Income.

You don't subtract a vacancy rate from the misc. income. You add that later. Just think of it like that. I think you're over thinking this.
 
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