REFINACIÓN

When you seek financing for an income-producing property, the lender will almost certainly expect you to project some amount of vacancy and credit loss. It’s better for you to do it rather than to ignore the issue and have the loan officer come up with a number. Your local market will probably dictate what’s reasonable, but if you have no idea, then choose a percentage that’s large enough to be visible but not so big as to throw your cash flow projections into free fall—perhaps 2% to 4%.

Test Your Understanding

1. You know that a property has a gross scheduled income of $100,000 and a GOI (i.e., income after vacancy and credit loss) of $97,500. What is the percentage of vacancy and credit loss?

2. If a property has a GOI of $76,000 after experiencing a 5% vacancy and credit loss, what must it’s gross scheduled income be?

Answer

1. First, figure out the dollar amount of loss. If you start with $100,000 and are left with $97,500, then your vacancy and credit loss is $2,500. You can now re-state the question as, “2,500 is what percentage of 100,000?” or

2,500
What percentage?  100,000

Transpose this to:

2,500 / 100,000
What percentage? 0.025
What percentage?

0.025 is the decimal representation of 2.5%

2. You know that

Gross Scheduled Income less Vacancy and Credit Loss
Gross Operating Income

You also know that in this problem the vacancy loss is equal to 5% of the gross scheduled income, so the two expressions are interchange- able. You also know the GOI is $76,000. Restate the problem like this:

Gross Scheduled Income

less 5% of Gross Scheduled Income
76,000

Now things should fall into place:

95% of Gross Scheduled Income
76,000 Gross Scheduled Income
76,000 / .95
80,000

You can test to prove this answer is correct. If the gross scheduled income is $80,000 and you lose 5% to vacancy and credit, are you left with $76,000 as the original problem says? Try it.

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Calculation 8:

Gross Operating

Income (Effective

Gross Income)

What It Means

The gross operating income (GOI) (also called effective gross income, or EGI) equals the property’s annual gross scheduled income less vacancy and credit loss. GOI is not the property’s potential income, but represents instead the actual income that you expect to collect.

If you’ve read the previous two chapters about gross scheduled income and vacancy and credit loss, then you should implicitly understand GOI; it is simply the difference between those two amounts. We won’t belabor the term here, but just provide a quick review of the calculation. If you haven’t done so already, you should read the previous two chapters.

How to Calculate

Gross Operating Income
Gross Scheduled Income less Vacancy and Credit Loss

When you analyze a property’s income and cash flow, you’ll generally start from the top down, so it is useful to picture the calculation like this:

Gross Scheduled Income less Vacancy and Credit Loss
Gross Operating Income

Example

You have a property that is fully rented and takes in revenue of $5,000 per month. You expect a vacancy and credit loss of 3%. What is the GOI?

You first need to know the gross scheduled income. You have no vacant units to account for in calculating the gross scheduled income, so you can multiply the monthly income of $5,000 by 12 to find the annual amount:

Gross Scheduled Income
12  5,000
60,000

Next, you need to figure the vacancy and credit loss, which in this case you estimate to be 3% of the gross.

Vacancy and Credit Loss
60,000  0.03
1,800

Now you have a simple subtraction to perform:

Gross Scheduled Income 60,000

less Vacancy and Credit Loss 1,800
Gross Operating Income 58,200

Test Your Understanding

You have a property with 12 units.

• Units #1 through #4 rent for $1,400 per month.

• Unit #5 rents for $1,200 per month. In month 10, the rent will increase to $1,350.

• Units #6 though #9 rent for $1,600 per month.

• Unit #10 is vacant. Its fair market value is $1,500 per month.

• Unit #11 rents for $1,600 per month, but will be vacant at the end of month 9. The market value of this unit when it becomes available will be $1,600 per month.

• Unit #12 rents for $1,275 per month.

You estimate a vacancy and credit loss of 7%.

What is the property’s GOI? Does the allowance for vacancy seem reasonable?

Answer

According to the formula, you must first determine the gross scheduled income and the vacancy loss. Then you can find the difference, which is the GOI.

Gross Scheduled Income less Vacancy and Credit Loss
Gross Operating Income

• Units #1 through #4 rent for $1,400 per month, or $16,800 per year. There are four such units, so their combined rent is 4  16,800 or 67,200.

• Unit #5 will rent for nine months at $1,200 and for the last three months at $1,350: (9  1,200)  (3  1,350)
14,850 for this unit.

• Units #6 through #9 rent for $1,600 per month, or $19,200 per year. There are four such units, so their combined rent is 4  19,200 or 76,800.

• Unit #10 is vacant, but its market rent is $1,500 per month or $18,000 per year. You expect to find a tenant at that rent by month 5.

• Unit #11 rents for $1,600 per month, but will go vacant at the end of month 9. However, its market rent will still be 1,600, so this unit repre- sents 12  1,600 or 19,200 in scheduled rent.

• Unit #12 rents for $1,275 per month or $15,300 per year.

You now have the total scheduled rent for all of the units and can add them up to get the gross scheduled income:

Units #1 through #4: 67,200

Unit #5: 14,850

Units #6 through #9: 76,800

Unit #10: 18,000