Question on calculating projected income

[James Ross]

Hello Everyone!

So I'm reading through the ABCs of Real Eastate and am in chapter seven "Is It Really a Diamond?".  I wanted to ask a question on the numbers people use when evaluating vacancy to get projected income on an apartment.  Projected income is based on the actual rent being generated, rather than the advertised rent per unit (my take away is this is because rents change over time and current tenants may be grandfathered in at an old rate).  I see that Ken McElroy first calculated the projected income based on the historical rents, then uses this number and the excepted vacancy percentage to calculate the expected income lost to vacancy.  For reference, this is in the "income" chart on page 90

My question is, doesn't it make more sense to calculate vacancy off of the maximum potential income (assuming all units are rented at the current market rate) rather than the actual potential income?  Any vacant unit has the potential to be rented for the current market rate, not the average rate that the current tenants pay.  Aren't you actually missing out on that current market rate with vacancy?

To put some numbers on it, if 10 units have a current market rent for $500/month each, but the 10 units are rented at an average of $450/month right now, the way he calculates vacancy uses the $450 number.  With 10% vacancy (90% occupied), this means a total potential income of $4,050/month ($450*10*90%).  Calculating it the way I'm describing above would use the $500 number, giving a vacancy of $4,500 ($500*10*90%).  This gives a more conservative number, which is good I would think.  

So to sum up, why not use the actual generated rent for the gross potential income ($4500/month), but the market rate for vacancy ($500 at 10% vacancy) for a total of $4,000 in potential income?

Thank you for the help!  This is the first I'm learning about apartment investing rather than single family homes and it's quite different.