What does gross income exclude when calculating effective gross income?

When calculating effective gross income, gross income excludes vacancy and collection losses. This is because effective gross income aims to provide a more accurate representation of the income a property is expected to generate after accounting for potential income losses associated with vacancies and tenants not paying their rent.

Gross income starts with the total potential income that can be generated from all rental units or gross sales. However, not all of this income is realizable in practice due to vacancies—rooms or units that stand empty will not generate income— and collection losses, which refer to the inability to collect rent from tenants for various reasons. By excluding these losses from the gross income figure, appraisers arrive at the effective gross income, a more reflective measure that considers the operational realities of property income.

The other elements listed, such as maintenance costs, taxes and assessments, and insurance premiums, do not factor into the calculation of effective gross income directly. Instead, they are considered operating expenses that would be deducted from effective gross income to ascertain net operating income. Therefore, recognizing that vacancy and collection losses are excluded is key to understanding how effective gross income provides a clearer picture of income-generating potential.