Unlocking Your Investment Potential with Potential Gross Income (PGI)

What Is Potential Gross Income?

Potential Gross Income (PGI) is the total amount of income that a real estate property could generate without accounting for vacancies or collection losses. This figure assumes that all rentable space is occupied and paying rent at the market rate. It serves as a baseline for assessing the income potential and overall profitability of the investment property. Importantly, PGI does not include additional revenues such as miscellaneous income from parking fees or laundry services.

Why PGI Matters

Understanding PGI is crucial for investors as it helps estimate the property’s earning capabilities in an ideal scenario. By assuming full occupancy, it offers a way to compare different properties under identical conditions, making it simpler to evaluate which ones might yield the highest returns.

How to Calculate Potential Gross Income

The calculation of PGI can be summarized as:

“> Potential Gross Income (PGI) = Total Rentable Space x Average Rent Per Square Foot”

An Example

Consider an office building with 12,000 square feet of rentable space. The building commands an average rent rate of $30 per square foot annually. The PGI for this property is calculated as:

“> PGI = 12,000 sq ft x $30/sq ft = $360,000 per year”

This figure does not include additional income, such as $7,000 from leased amenities or any adjustments for a 4% vacancy and collection allowance. These are calculated separately and do not alter the PGI.

From PGI to Bottom Line

While PGI offers an impressively high figure, investors should remember it’s a theoretical maximum. To get a realistic net income viewpoint, other metrics such as Effective Gross Income (EGI) and Net Operating Income (NOI) need to be considered. Effective Gross Income accounts for vacancy and collection losses, and miscellaneous income, providing a more accurate portrait of the property’s revenue.

Frequently Asked Questions (FAQ)

How does PGI differ from Effective Gross Income (EGI)?

Clear contrast; while PGI assumes full occupancy, EGI discounts for actual occupancy rates and includes miscellaneous income streamlining into running numbers you can bank on.

Is the Potential Gross Income the same for commercial and residential properties?

Yes, the calculation principle remains consistent across various property types—from multi-use commercial buildings to residential complexes.

Why are vacancy and collection losses not included in PGI?

PGI represents an ideal scenario without those potential revenue-snags, which are factored in under EGI and NOI metrics for a realistic bottom-line view.

Related Terms: Effective Gross Income (EGI); Net Operating Income (NOI); Gross Potential Rent (GPR); Real Estate; Investment Analysis