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Apartment Loans Secrets
2 min read
by Content Team

GPI: Gross Potential Income

In this article:
  1. What is Gross Potential Income?
  2. Gross Potential Income vs. Effective Gross Income
  3. Related Questions
  4. Get Financing
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What is Gross Potential Income?

Gross potential income (GPI), sometimes referred to as gross scheduled income (GSI), refers to the amount of income a commercial property can generate at 100% rental occupancy. GPI is often compared to gross potential rent (GPR), but — unlike GPR — gross potential income includes other, non rental sources of income, such as paid parking spots, laundry facilities, or vending machines.

To illustrate this difference with an example, imagine a 15-unit apartment building with each unit renting for $2,000 per month. The gross potential rent would be $30,000 per month, or $360,000 per year. However, if that same property also has 50 parking spots available for $50 per month and can expect income from on-site vending machines to the tune of $350 each month, gross potential income would include those, resulting in a GPI of $32,850 per month, or $394,200 per year.

Gross Potential Income vs. Effective Gross Income

While an important metric for commercial property investors to analyze, gross potential income is more often used to determine the effective gross income (EGI) of a property. A similar metric to GPI, effective gross income (EGI) reflects the income that a property owner is actually earning. EGI is a more accurate metric of earnings that can be calculated by taking a property’s gross potential income and subtracting vacancies and credit loss. While vacancies are common and relatively easy to account for, credit losses come into play when a tenant does not pay part or all of rent owed — and can make EGI calculations a little trickier.

EGI is a common factor in the valuation and underwriting stages of commercial real estate debt transactions, as it is an important metric in the calculation of a property’s [net operating income (NOI)]() and [cap rate](). The EGI can also be used to help a lender assess the debt service coverage ratio.

All things considered, a property's GPI is important in the profitability calculations of commercial real estate. The gross potential income by itself may not always be particularly useful in real-world scenarios, but the result itself is widely utilized in deeper investment analyses.

Related Questions

What is GPI in commercial real estate?

Gross potential income (GPI), sometimes referred to as gross scheduled income (GSI), refers to the amount of income a commercial property can generate at 100% rental occupancy. GPI is often compared to Gross Potential Rent, but — unlike GPR — gross potential income includes other, non rental sources of income, such as paid parking spots, laundry facilities, or vending machines.

Gross potential rent is often equated with gross potential income (GPI), which, in practice, is often the same, but sometimes incorporates potential income from parking spaces, vending machines, and other ancillary income sources. Another related term, effective gross income (EGI), is calculated by taking a property’s gross potential income, and subtracting all physical and economic vacancies.

How is GPI calculated for apartment loans?

Gross potential income (GPI), sometimes referred to as gross scheduled income (GSI), is the amount of income a commercial property can generate at 100% rental occupancy. To calculate GPI for apartment loans, you must first calculate the property's gross potential income (GPI), or gross potential rental income (GPRI). This includes any additional income generated by the property, such as income from vending machines, paid parking spaces, storage units, pet fees, or other similar sources.

The next metrics to be determined are the vacancy and credit costs. Unlike with GPRI, which assumes zero vacancies and all rents paid in full each month, effective gross income accounts for the more realistic issues of vacancies and credit disruptions that most property owners find unavoidable. In most cases, these figures are determined utilizing any available industry, market, and historical data of relevance.

Once you have determined all of the aforementioned figures, the GPI formula is straightforward. Effective gross income is typically representative of annual revenues, so all of its components should be calculated on an annual basis as well.

What factors affect GPI when applying for an apartment loan?

When applying for an apartment loan, the Gross Potential Income (GPI) of the property is taken into consideration when determining the loan amount. Factors that affect GPI include the size of the property, the number of units, the location, the condition of the property, and the rental rates. Additionally, the lender will also take into account the Net Operating Income (NOI) of the property, which is the GPI minus the operating expenses. The lender will also look at the Debt Service Coverage Ratio (DSCR), which is the NOI divided by the total debt service. A DSCR of 1.25-1.30x is typically expected.

Sources:

  • Apartment.loans: How to Purchase an Apartment Property
  • Apartment.loans: Apartment Mortgage Calculator
  • Multifamily.loans: The Pros of Investing in Apartments Early

What are the benefits of using GPI when applying for an apartment loan?

I don't know.

What are the risks of using GPI when applying for an apartment loan?

When using GPI to apply for an apartment loan, there are a few risks to consider. First, GPI is based on the assumption that the property will be 100% occupied, which may not always be the case. If the property is not able to achieve full occupancy, the GPI may not be accurate and the loan may not be approved. Additionally, GPI does not take into account any expenses associated with the property, such as taxes, insurance, or maintenance costs. This means that the GPI may not accurately reflect the actual cash flow of the property, which could lead to a loan being approved that is not sustainable in the long run.

It is important to note that GPI is only one factor that lenders consider when evaluating an apartment loan application. Other factors, such as the borrower's creditworthiness, the property's location, and the borrower's experience in the industry, are also taken into account. For this reason, it is important to work with an experienced intermediary, like the ones we have at apartment.loans, to ensure that all of the necessary information is provided to the lender in order to get the best loan possible.

In this article:
  1. What is Gross Potential Income?
  2. Gross Potential Income vs. Effective Gross Income
  3. Related Questions
  4. Get Financing
Tags
  • apartment financing
  • Multifamily loans
  • commercial real estate
  • GPI
  • Gross Potential Income
  • Commercial Underwriting

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