Multifamily Investing Podcast  with Multifamily Attorney Charles Dobens 

Understanding Multifamily Lingo: “Income Reducers”

blog May 29, 2020
Income Reducers: What are they? The difference between the Gross Potential and the Gross Collective are categories of rental income that we call Income Reducers. Income Reducers bring you from Never Never Land to Reality in terms of understanding how you are managing the property.

There are two types of income. There's what we call rental income and other income. So we look at the rental income separately than all the other income because the rental income is comparable to other properties down the street. 

But the other income is usually unique to that particular property. That is why we break up rental income and the other income. And we have the other income within that category. We have two other categories : good income and bad income. But we're not going to talk about the other income right now. All we're talking about is the rental income. 

When we break down rental income, we start at the very top, which is the Gross Potential. This is never, neverland. This is where nobody ever, ever hits it. No one ever is delinquent, no one ever dies, no one ever gets divorced and no one ever moves out. Everyone pays the top dollar for rent. And that's the gross potential. 

But you can't pay your bills on the gross potential because you never have that amount of money. You pay your bills on the gross collective. That's the money that is actually in your bank account. But accountants account for all of these categories because they help you understand how to run your property. It's a basis of managerial accounting. 

You need to know this information so that you can figure out exactly how to know how to run your property. The difference between the gross potential and the gross collected are categories of income that we call Income Reducers. They bring you from never, neverland to reality. And by breaking it up and by giving them different names you know what's going on to that property. You know how to manage that property the right way. 

I have this particular student who asked me the question, “what exactly are Income Reducers? Can you give me a breakdown on that?” Well, here are some of them :

  • Loss to Lease
That's what you should be getting for your property versus what you're actually getting for your rent. Rental for one bedroom or for your two bedrooms - the difference between the two. That's Loss to Lease. Well, you might be thinking yourself, why categorize that? Why do we even keep track of that? Because it helps us understand how well we're marketing our unit. It helps us understand what type of things we need to do in order to get that extra or how hard we have to work in order to get that extra money. So that's the first example of an income reducer that brings us down. 
  • Physical Vacancy 

Remember never, neverland when all of our units are full? Reality is, it ain't like that all the time. We can have vacant units or we have people who move out. We have people that skip all those types of things. We have vacancies. 

Now we break down the vacancies in two categories - physical and economic. Because each one tells us something different about how we're managing the property, physical vacancy means we got to market more. Economic vacancy means we can't. When we market more, we have to screen the people better and not bring on the deadbeats. 

  • Employee Units

There are going to be some units that you never can rent out. Sometimes you see these people using rental units as storage units. Like the owner is saying "hey, that unit's a down unit. So let's start putting stuff in there." So we turn that unit around and start bringing in $7,000 a year of income. You can capitalize that instead of letting it just sit there as a vacant unit. It just doesn't make any sense. 

But you know that's part of what we're seeing and that same thing is true with employee units. You got to figure out. You've got to account for that lost revenue. And it shows up as an income reducer. Then finally, concessions is one that we always talk about.

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