Which type of rent is considered when determining the effective gross income?

Which type of rent is considered when determining the effective gross income?

• A. Market rent
• B. Contract rent
• C. Subsidized rent
• D. Built-in rent

Answer: (A)

The key idea is to base potential income on what the property could earn at current market rates, not on rents that are already in place. Effective gross income is tied to potential gross income, which uses market rent to estimate how much income the property could generate if all units were leased at prevailing rates. This provides a realistic picture of earning power, and then vacancies or credit losses are subtracted to arrive at the actual effective gross income. Using contract rents would reflect rents already in place (which may be below market), while subsidized or other non-market rents would distort the measure. So market rent best represents the income the property could realistically produce.

The key idea is to base potential income on what the property could earn at current market rates, not on rents that are already in place. Effective gross income is tied to potential gross income, which uses market rent to estimate how much income the property could generate if all units were leased at prevailing rates. This provides a realistic picture of earning power, and then vacancies or credit losses are subtracted to arrive at the actual effective gross income. Using contract rents would reflect rents already in place (which may be below market), while subsidized or other non-market rents would distort the measure. So market rent best represents the income the property could realistically produce.