In real estate investing, there are a number of different factors that help an investor determine the viability and profitability of a particular investment. One of those factors is the gross potential income of a property. If you plan to invest in commercial real estate or rental property, learn what gross potential income is, how to calculate it, and how it's used in real estate.
Gross potential income defined
Gross potential income (GPI) refers to the total rental income a property can produce if all units were fully leased and rented at market rents with a zero vacancy rate. Gross potential income can also be referred to as potential gross income, gross scheduled income, or gross potential rent.
The GPI of a property is a pro forma projection and does not take into account the actual rent of the property, the average vacancy rate for the area or property type, any operating expense, or any debt service relating to owning the property. It's the income a property could potentially produce, not what it actually would produce.
How to calculate gross potential income
Calculating the gross potential income of a property is actually quite simple. Determine the current market rent by looking at comparable properties, and multiply the rent amount by the number of rental units. For example, if you want to know the potential gross income of a 10-unit apartment with five two-bedroom units that each have a target rent of $1,050 and five one-bedroom units that each have a target rent of $800 the GPI would be calculated as follows:
$1,050 x 5 = $5,250
$800 x 5 = $4,000
$5,250 + $4,000 = $9,250 (GPI)
How it's used in real estate
Gross potential income is used to help a real estate investor or lender underwriting a loan determine the effective gross income (EGI) of a property. The EGI uses the gross potential income of the property in addition to any extra potential income, such as laundry fees, pet fees, or parking fees, while subtracting vacancy costs to determine the net income of the investment property. The EGI can then be used to calculate the value of the property by calculating its net operating income (NOI) or cap rate or helping the lender determine the debt service coverage ratio.
A property's GPI is important to know but is not necessarily a realistic income for the landlord to collect. Rather it's a helpful calculation that can be used to further analyze the profitability of an investment property.