What is Gross Potential Rent?
The Gross Potential Rent (GPR) measures the maximum rental income that a real estate investment property could generate.
Conceptually, the gross potential rent (GPR) sets the “ceiling” in the capacity for rental income that can be extracted on an investment property.
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How to Calculate Gross Potential Rent (GPR)
In commercial real estate (CRE), gross potential rent (GPR) refers to the total rental income that a property investment can generate based on three implicit assumptions:
- 100% Occupancy Rate → The units available for rent in the property are all occupied by a tenant. Therefore, there are no idle vacant units (i.e. vacancy rate of 0%) in the property that are not producing income.
- Market Rent → The rental pricing of each unit is at the market rate, i.e. the periodic rent charged to tenants is near or equivalent to that of comparable properties at present.
- No Credit Losses (Collection) → The tenants of the property fulfill their payment obligations on time, with no issues regarding the collection of rent such as late payments or defaults.
With that said, the gross potential rent (GPR) is a pro forma metric because the actual rent collected by the landlord (or real estate investor) will deviate from the implied income value.
Therefore, the use-case of the gross potential rent (GPR) metric is to quantify the upper parameter of obtainable income.
A landlord strives to generate earnings near this full capacity – however, this is practically unattainable in reality.
Why? The revenue model of managing rental properties is affected by unpredictable variables outside of the owner’s control.
For instance, incurring vacancy and credit losses is inherent to the business model, irrespective of the time and effort spent to mitigate the risk of unoccupied units and collection issues.
The steps to calculate the gross potential rent (GPR) are as follows.
- Determine the Number of Units Available for Rent (i.e. Rentable Units)
- Estimate the Market Rent Based on Historical Data and Market Data on Comparable Properties
- Multiply the Number of Rentable Units by the Market Rent Per Unit
- Convert the Monthly Gross Potential Rent (GPR) into an Annualized-Figure
Gross Potential Rent Formula (GPR)
The formula to calculate the gross potential rent (GPR) is as follows.
- Number of Units → The total number of units in the rental property that are available to be leased to a tenant to produce rental income.
- Market Rent → The pricing rate of rent based on analyzing the prices charged by comparable properties in terms of property features, location, and more.
The market rent is ordinarily expressed on a monthly basis. Therefore, the monthly GPR must be multiplied by 12 to annualize the output.
The ancillary income of a property – the income earned on the side from non-rent sources, such as charging tenants for amenities access – can also be added to the total.
However, the inclusion of ancillary income means non-rental income is part of the metric – thus, the metric should be referred to as “Gross Scheduled Income (GSI)” or “Potential Gross Income (PGI)” instead, as GPR focuses on rental income.