What is deducted from potential gross income to arrive at effective gross income?

To determine effective gross income, one must account for vacancy and collection loss, which directly impacts the income that a property is likely to generate. Potential gross income represents the total income a property would produce under optimal conditions, without any interruptions or losses. However, in real-world scenarios, not all potential income is realized due to vacancies (unrented units) and collections loss (non-payment of rent by tenants).

By deducting vacancy and collection losses from potential gross income, you arrive at effective gross income, which reflects a more accurate figure of the actual revenue a property can expect to generate. This figure is crucial for any investor or property manager to understand the financial performance of a property.

Operating expenses, capital expenditures, and property management fees are indeed important components of property management and financial structuring, but they come into play after calculating effective gross income. They are not deducted from potential gross income to arrive at effective gross income; rather, they are subtracted later to determine net operating income and cash flow.