How to Calculate Potential Gross Income

Potential Gross Income (PGI) represents the maximum revenue a property could theoretically generate, assuming full occupancy and rent collection. It serves as a foundational metric in real estate financial analysis, providing an optimistic baseline for evaluating a property’s earning potential before considering vacancies or uncollected payments. Understanding PGI is a starting point for investors to assess the inherent value and capacity of a real estate asset.

Components of Potential Gross Income

Potential Gross Income is comprised of two main categories: rental income and other income. Rental income accounts for the primary source of revenue from the property’s units. This includes scheduled rent from occupied units and estimated market rent for vacant units. Market rent refers to the prevailing rental rate for comparable properties in the same geographical area with similar characteristics.

Beyond direct rental payments, other income encompasses various non-rental revenue streams generated by the property. These sources can significantly contribute to a property’s overall earning capacity. Examples include income from parking fees, on-site laundry facilities, vending machines, and storage units. Additional income streams might involve pet fees, utility bill-backs, or charges for premium amenities and services offered to tenants.

Data Collection and Verification

Accurately determining Potential Gross Income requires meticulous data collection and thorough verification of all financial information. For rental income, current rent rolls and executed lease agreements for occupied units are primary sources, detailing the agreed-upon rental amounts and payment schedules. To estimate income from vacant units, conducting a comparable market analysis is essential, which involves researching recent leasing transactions for similar properties in the same market. Online platforms, real estate professional insights, and dedicated market analysis tools can assist in identifying appropriate comparable properties and their rental rates.

For other income categories, historical financial statements and operational records provide the necessary data to quantify these revenue streams. This includes reviewing past invoices, bank statements, and internal reports related to parking, laundry, vending, or storage fees. Verifying the accuracy and reliability of all collected data is paramount, as discrepancies can lead to an inaccurate assessment of the property’s potential income.

Calculating Potential Gross Income

Calculating Potential Gross Income involves combining the two primary income components: total potential rental income and total other income. The formula is straightforward: Potential Gross Income = Total Potential Rental Income + Total Other Income. The total potential rental income is derived by multiplying the number of units by their respective scheduled or market rents, assuming 100% occupancy for all units.

For example, consider a property with 10 apartment units. If 8 units are occupied with a scheduled rent of $1,000 per month each, and 2 units are vacant but could rent for $1,100 per month each based on market analysis, the total potential rental income for a month would be (8 units $1,000) + (2 units $1,100) = $8,000 + $2,200 = $10,200. If this property also generates $500 per month from parking fees and $150 per month from laundry facilities, the total other income would be $650 per month. Therefore, the Potential Gross Income for the month would be $10,200 + $650 = $10,850. This monthly figure can then be annualized by multiplying by twelve to get the annual Potential Gross Income.