Potential Gross Income – Everything You Need to Know

Investors must know the value of a property before committing funds. Importantly, potential gross income (PGI) is a crucial input into value assessment. In this article, we’ll define PGI, which we also call gross scheduled income. Then, we’ll explain the potential gross income formula and how to use it. Next, we’ll provide an example of gross scheduled income and explore gross scheduled income vs effective gross income. Finally, we’ll show how Assets America® can help and we will answer a few frequently asked questions.

What is Potential Gross Income?

PGI (aka gross scheduled income) is the total income a property will produce if it is fully leases the subject property at the prevailing market rents. Frankly, it is an ideal number, often different from the actual rent that the property produces. Specifically, you may not collect gross scheduled income for various reasons, including:

  • Rent is above or below market.
  • The occupancy rate is less than 100%.
  • Some tenants are not paying their rent.
  • The landlord rebates part of a tenant’s rent.
  • Part of the property is temporarily not rentable.

Therefore, gross scheduled income is a target number, achievable in some properties and not in others. Ultimately, as we shall see, gross scheduled income is different from effective gross income.

Gross Scheduled Income vs Effective Gross Income

Effective gross income (EGI) is different from gross potential income. The difference involves extra factors that affect rent collections. Firstly, there are expense reimbursements that the tenant pays you. Generally, these may include insurance, maintenance, and real estate taxes. In contrast, an absolute net lease requires the tenant to pay all expenses.

Secondly, a factor that reduces PGI to EGI is collection and vacancy loss. Collection loss is the projected amount of rent that you won’t be able to collect for the period. Alarmingly, this could stem from various factors, such as rent strikes, squatters, evictions, and deadbeats. Vacancy loss occurs when you can’t rent out all of your available units. Or, someone moves out that you cannot immediately replace. During the lease-up phase of a new property, you must recruit and sign new tenants. Obviously, this takes time, which creates vacancy loss. Clearly, your hope is to stabilize the property at 100% occupancy as soon as possible.

Thirdly, other income impacts EGI. These include income from laundry machines, vending machines, parking, storage units, pet fees, late fees, etc. Notably, you can estimate the EGI factors using industry benchmarks, comparable properties, and/or historical performance. Appraisers consider all these factors when evaluating properties.

Potential Gross Income Formula

The formula for PGI is:

PGI = Σ (market-level rent per unit x number of units at that rent).

This covers all cases in which different units have the same or different rents.

How to Calculate Gross Scheduled Income

Here is how you would calculate gross scheduled income. In a spreadsheet, list all of your units in Column A. In column B, enter the monthly rent for each unit. In Column C, put the product of 12 times B. Finally, sum Column C to arrive at the gross scheduled income.

Examples of Potential Gross Income

Let’s assume you have six units to lease in a small, new office building. Three of the units rent for $700 per month and the other three rent for $1,000 per month. The following chart shows the results:

Video:  How to Calculate Potential Gross Income

Unit

Monthly

Annual

Number

Rent

Rent

     

1A

$     700

$   8,400

1B

$ 1,000

$ 12,000

2A

$     700

$   8,400

2B

$ 1,000

$ 12,000

3A

$     700

$   8,400

3B

$ 1,000

$ 12,000

PGI

 

$ 61,200

In this example, the gross scheduled income is $61,200.

Next, let’s calculate the EGI for the property as follows:

PGI

$ 61,200

Vacancy loss

$ (1,700)

Collection loss

$         0

Parking fees

$ 7,200

Vending machines

$ 5,000

EGI

$ 71,700

Notice how the fees from parking and the vending machines create a positive addition to PGI. Conversely, we estimate vacancy loss of one month each for an A unit and a B unit. The result is an EGI of $71,700 per year.

Evaluating the Example Property

The example property is an existing building with triple-net leases. You (the landlord) are responsible for other expenses that amount to $10,000/year. Thus, your net operating income (NOI) is $71,700 – $10,000 = $61,700.

The property has a cap rate of 10%. Plugging into the cap rate formula, we find the property value to be $61,700 divided by 10% = $617,000. You bid that amount to purchase the property.

You qualify for a loan-to-value ratio of 70%. Therefore, you must come up with a 30% down payment, equal to 0.3 x $617,000, or $185,100. You receive a loan for the remainder, $431,900, to buy the property.

How Assets America® Can Help

Before you can worry about the rent you’ll collect, you have to own a property. Obviously, that means you must purchase one, build one, and/or renovate one. That’s where Assets America® can help. We can arrange many sorts of financing for projects or acquisitions starting at $10 million and above. This includes construction loans, bridge loans, acquisition loans, mezzanine loans, mini-perm loans, takeout loans, and more.

Renovation Help

Loans to renovate properties can be extremely helpful when you want to increase your rental income. With the money you borrow from Assets America®, you can:

  • Increase the potential gross income by enhancing existing units to rent for a higher market rate.
  • Increase the gross scheduled income by increasing demand for your units, thereby increasing occupancy rates.
  • Reduce the need to make rent concessions because your units are more desirable.
  • Enhance your ability to receive higher reimbursements for expenses you pay.
  • Make it easier to move expenses to tenants via triple-net leases and absolute leases.
  • Increase the quality of your tenants thereby reducing credit costs.

Construction Help

But what if you want to build a new office building or apartment tower? Assets America® can get you the money you need to build upscale, high-quality properties that will command premium rents. You may find it easier to get more funding from Assets America® than you can from a bank. With increased funding, you can take steps during construction to help ensure top rents, including:

  • Building larger properties with greater economies of scale.
  • Build in the hottest neighborhoods.
  • Purchase generous-sized parcels of land that allow you to build large properties without undue crowding.
  • Choose top-quality materials and highly skilled labor.
  • Provide spacious layouts with premium furnishings, appliances, and amenities.
  • Include large lobbies, on-premise restaurants and bars, athletic facilities, retail stores, and other value adds.

Frankly, that’s an incomplete list — there are many ways to employ funding to build high-rent properties.

If you’d like to find out more about how Assets America® can help, contact us for a confidential consultation.

Frequently Asked Questions

What is GSI in real estate?

GSI, or gross scheduled income, is a synonym for potential gross income. It’s the income you can earn from a rental property under ideal circumstances of market rents and full occupancy.

What should the gross rent multiplier be?

Gross rent multiplier (GRM) is the price of a property divided by its annual rental income. It is in years, and ideally, you’d like it to be four to seven years. That is the amount of time to recoup your investment in the property.

What is the monthly gross rent multiplier formula?

The monthly gross rent multiplier is the GRM multiplied by 12. It is in months. It is the number of months it will take to earn back your investment in a rental property.

What are potential pitfalls when using potential gross income?

The biggest pitfall when using PGI is self-deception. Many investors want to picture a large income stream from rent. Therefore, they adopt a rosy scenario involving market rents and extremely high occupancy rates. A good lender like Assets America® can help save you from the risks of self-deception.

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