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In real estate investing, many multipliers are used when calculating a property’s income generation potential. One such metric is a property’s gross potential rent. By understanding this metric, investors can understand how much a property will generate once vacancies are filled based on market rents of similar properties in the same area.
When comparing actual income to potential income, it becomes easier to determine how much value can be added to the property and, thus how much the return on invested capital can be increased. It is also important to understand just how much value can actually be added in real-world circumstances.
Key Takeaways
- The gross potential rent is the total rent an investor can collect from a property assuming a 0% vacancy rate
- Gross potential rent differs from gross operating income by considering potential income. In contrast, gross operating income looks at the actual revenue generated by the property.
What is Gross Potential Rent? - (GPR) in Real Estate
In real estate, gross potential rent is the total rent an investor can collect from a property assuming a 0% vacancy rate. The figure also assumes that no existing tenants are in default and that rent is paid in full monthly.
It represents the best-case scenario – a property fully rented with vacancies filled at market rate. Even if this scenario is never attained in actual operations, it’s best to find rental properties with an opportunity to add value as an investor.
Effective gross income sits a step below this number once vacancies and uncollected rent are baked in.
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How do you Calculate Gross Potential Rental Income?
Gross potential rent is calculated by adding a property’s total rent to the income-generating potential of vacant units. For example, let’s take an 8-unit apartment building with six occupied units. Each unit is rented for $1,500/month. The property’s 2 vacant units could potentially be rented at the market rate of $1,600/month each. The potential rent from the vacant unit is calculated based on the market rent of similar units in the area.
Thus, when adding the rental income from the six units and the potential income of the two remaining units, the result is $12,200/month or $146,400 annually.
That ceiling number feeds the going-in cap rate calculation a buyer would use to price the property.
Gross Potential Rent vs Gross Operating Income
Gross potential rent differs from gross operating income by considering potential income. In contrast, gross operating income looks at the actual revenue generated by the property. We can calculate the property’s gross operating income similar to how we did in the previous example, but this time instead, removing the potential income from the two vacant units.
That leaves a gross operating income of $9,000/month or $108,000/year. If the gross rent is $146,400, there is an opportunity to generate an additional $38,400 from the rental property. Such a significant increase will increase the property’s value and cash flow, improving your return on capital.
No matter how well you manage your property, you will not be able to control 100% of the variables that influence the property’s income. Even a qualified, well-vetted tenant can fail to pay their rent.
Tenants can move out before the end of their lease, leaving you with a vacant unit and unpaid rent to collect. Even in the best scenario, you likely won’t be able to maintain a property’s ideal income generation potential.
Frequently Asked Questions About the Gross Potential Income of a Commercial Property
Does rental income count as gross income?›
Yes, generally income amounts to effective gross income before any operating expenses are considered. Understanding rental income allows a real estate investor to optimize their invested capital.
What is GPI in real estate?›
GPI is a property’s gross potential income. This figure is based on the property’s potential income when considering vacancies.
Gross Potential Rental Income - Conclusion
The best investments often create a value-add opportunity, yielding a higher ROI than buying a property already generating maximum cash flow. This is why potential income is vital to understand in real estate investing. By understanding a property’s potential gross income, investors can better understand the future value of their investment as long as that income is captured.
The next step in the process of understanding true cash flow and value would be to take your total gross income and subtract your operating expenses to find your net operating income (NOI). The NOI is one of the most important figures needed to understand value, as commercial real estate is largely purchased and valued based on a multiple of its NOI.
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Sources:
- Janover, “GPR: Gross Potential Rent“
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Marco Canonaco
Marco is the Co-Founder of Willowdale Equity, leading acquisitions and debt placement on the firm's Class B & C value-add multifamily portfolio across the Southeastern U.S. He brings deep underwriting and capital-markets experience to every deal the firm sponsors.
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