In the Income Approach, what do you subtract from potential gross income to find effective gross income?

In the Income Approach to real estate valuation, the calculation of effective gross income starts with potential gross income, which represents the total income a property could generate if it were fully rented and operating at full efficiency. To find the effective gross income, you need to account for the realities of the rental market, which often includes factors such as vacancies or the likelihood of collection loss due to tenants not paying their rent.

Subtracting vacancy and collection loss from potential gross income provides a more realistic and achievable figure, which reflects what the property is likely to earn. This adjustment acknowledges that not all rental units will be occupied at all times, and some tenants may eventually default or be unable to pay their rent.

The other choices do not directly relate to this step in the Income Approach. Capital expenses typically refer to expenditures that improve the value of the property and do not factor into the calculation of gross income. Operating expenses are necessary to determine net income but are calculated after gross income is established. Depreciation costs are accounted for in valuing the property over time, but they do not play a role in adjusting gross income to arrive at effective gross income.