Gross Potential Rental Income includes the potential rental income leased at market rates, while Effective Gross Income takes into account other factors such as vacancies, concessions, other income, non-revenue units, and bad debt. Therefore, Effective Gross Income provides a more accurate estimate for how much income a property will actually generate, whereas the Gross Potential Rental Income provides a better estimation of the max potential revenue the property can generate.
If you have a property with 10 units with a market rent of $1,000 per month, then the Gross Potential Rental Income would be 10 units multiplied by $1,000 or $10,000 per month.
Gross Potential Rental Income in Real Estate
At Top Shelf Models, the Gross Potential Rental Income is typically one of the top lines in the revenue section on the cashflows. It provides a baseline of the total potential income a property can earn. It is important to have a good estimate of this metric since it is one of the biggest revenue items. Additionally, general vacancy, concessions, bad debt, and non-revenue unit assumptions can be based off a percentage of the Gross Potential Rental Revenue. If the Gross Potential Rental Revenue metric is incorrect, this can throw off the Effective Gross Income and ultimately the Net Operating Income, providing an incorrect perception of the profitability of operating the property.
Conclusion
Gross Potential Rental Income is essential to real estate professionals as it shows a property’s maximum potential ability to accrue income. This information serves as an important baseline for any evaluation of a property’s value and helps investors assess just how much revenue a given property can generate.
