Gross Income

Definition

Gross income in real estate generally refers to the total income generated from property before any expenses such as maintenance, taxes, and utilities are deducted. It is also used more broadly to represent all money earned before taxes and other deductions, encompassing various income sources.

Examples

Property Income:
- A building with 10,000 net rentable square feet of floor space rents for an average of $10 per square foot. Additional income from concessions in the lobby contributes $20,000 annually. Assuming a 5% vacancy rate is maintained:
  - Potential Gross Income (PGI): 10,000 sq ft * $10/sq ft + $20,000 = $120,000
  - Effective Gross Income (EGI): PGI - (PGI * 5% vacancy) = $114,000
Total Income Example:
- An individual earns $60,000 from employment, $8,000 from rental property, and $4,000 in retirement benefits. The gross income would be the sum of these amounts:
  - Gross Income: $60,000 + $8,000 + $4,000 = $72,000

Frequently Asked Questions

What is included in gross income for real estate?
- Gross income includes all rental income, fees collected (e.g., parking, amenities), and any other income generated directly from the property before any expenses are deducted.
How do you calculate potential and effective gross income for a property?
- Potential Gross Income (PGI) is calculated as total rental revenue plus other income sources. Effective Gross Income (EGI) is PGI minus a factor for vacancy and collection losses.
Why is gross income important in real estate?
- It gives a preliminary view of the income-generating ability of a property, helping investors gauge initial profitability before considering expenses.
What if the property has vacancy or collection issues?
- Gross income doesn’t account for vacancies or collection losses. However, Effective Gross Income (EGI) accounts for these factors, providing a more realistic income figure.
Is gross income the same as net operating income (NOI)?
- No, gross income is the total income before expenses. Net Operating Income (NOI) is gross income minus operational expenses.

Potential Gross Income (PGI): The total rental income a property could generate if fully occupied and without considering any vacancies or collection issues.
Effective Gross Income (EGI): Potential Gross Income adjusted for estimated vacancies and collection losses.
Net Operating Income (NOI): Income remaining after all operating expenses, excluding debt service and taxes, are deducted from the Effective Gross Income.
Capitalization Rate: A rate of return on a real estate investment property based on the income that property is expected to generate.

Online Resources

References

IRS Publication 17, “Your Federal Income Tax For Individuals”
BOMA (Building Owners and Managers Association) Guidelines on rental income and vacancies

Suggested Books for Further Studies

“Real Estate Finance and Investments” by William Brueggeman and Jeffrey Fisher
“Investment Analysis for Real Estate Decisions” by Phillip T. Kolbe, Gaylon E. Greer, and Henry W. Wolcott
“Principles of Real Estate Practice” by Stephen Mettling and David Cusic

Real Estate Basics: Gross Income Fundamentals Quiz

### What does gross income generally represent in real estate? - [x] The total income generated from property before any expenses. - [ ] The total income after all expenses are deducted. - [ ] Only the rental income from the property. - [ ] The amount received after taxes and insurance. > **Explanation:** Gross income is the total income generated from property before any deductions for expenses, taxes, or losses. ### What additional income sources could be included in gross income? - [ ] Only rental income. - [x] Rental income, alimony, child support, and retirement benefits. - [ ] Only salary and wages. - [ ] Casual income like gifts or lottery winnings. > **Explanation:** Gross income can include rental income, alimony, child support, self-employment income, retirement benefits, and more, before deductions. ### How do you calculate Potential Gross Income (PGI)? - [ ] Subtract expenses from total rent. - [ ] Subtract vacancy loss from total rent. - [x] Add all sources of income before expenses. - [ ] Add potential future income estimates. > **Explanation:** Potential Gross Income is calculated by adding all sources of rental income and other property-related income before accounting for expenses or losses. ### What does Effective Gross Income (EGI) consider that Potential Gross Income (PGI) does not? - [ ] Maintenance costs - [x] Vacancy and collection losses - [ ] Insurance premiums - [ ] Utility costs > **Explanation:** Effective Gross Income considers vacancy and collection losses and is calculated by deducting these from the Potential Gross Income. ### Which factor is not deducted from gross income to find Effective Gross Income (EGI)? - [ ] Vacancy rate - [ ] Collection losses - [x] Utility expenses - [ ] Rent concessions > **Explanation:** Utility expenses are operating costs, not factors deducted to calculate Effective Gross Income. EGI accounts for vacancy and collection issues. ### Why is gross income not the same as net income? - [ ] Gross income is a more inflated measure. - [ ] Gross income excludes non-rental sources. - [x] Gross income does not include expense deductions. - [ ] Net income is smaller due to other factors. > **Explanation:** Gross income includes total earnings before deducting any kind of expenses, unlike net income which takes expenses into account. ### Who needs to report gross income? - [x] Anyone who earns income before taxes. - [ ] Only businesses with taxable income. - [ ] Property managers only. - [ ] Real estate investors exclusively. > **Explanation:** Everyone who earns income, whether individuals or businesses, must report gross income before taxes and deductions. ### What does Net Operating Income (NOI) exclude that Effective Gross Income (EGI) includes? - [ ] Potential income - [ ] Rent and fees - [x] Operating expenses - [ ] Vacancy deductions > **Explanation:** Net Operating Income is calculated after deducting operating expenses from Effective Gross Income whereas EGI is adjusted for vacancies and collection losses. ### Which term relates closely to evaluating the income potential of a property before expenses? - [ ] Net Cash Flow - [ ] Equity Income - [x] Potential Gross Income - [ ] Maintenance Income > **Explanation:** Potential Gross Income is closely related to evaluating the income potential of a property before expenses and losses are considered. ### What aspect does Effective Gross Income provide a more realistic view of compared to Potential Gross Income? - [ ] Total possible rent - [ ] Property value assessment - [x] Actual income accounting for vacancies - [ ] External earnings > **Explanation:** Effective Gross Income accounts for vacancies and collection loss, which gives a more realistic view of the property's income than Potential Gross Income.