An allowance for vacancy and collection is usually estimated as a percentage of what?

The allowance for vacancy and collection is typically estimated as a percentage of potential gross income. Potential gross income represents the total income a property could generate if it were fully leased and all rents were collected. By estimating the vacancy and collection loss as a percentage of this figure, property managers and appraisers can account for the income that may not be realized due to vacancies or unpaid rents, reflecting a more accurate financial picture of the property’s performance.

Potential gross income provides a solid baseline for these estimates because it represents the maximum earning capacity of the property under ideal conditions. This approach helps analysts and investors gauge expected losses and adjust their financial forecasts or investment strategies accordingly. In contrast, using actual collected rent or operating expenses might not capture the total income potential and could lead to underestimating potential financial risks associated with vacancies and collections.