Effective Gross Income

Effective Gross Income (EGI) is a financial metric used in real estate investment analysis to measure the total income generated by a property, taking into account the effects of vacancy and credit losses, as well as any additional income sources. EGI provides a more accurate reflection of a property's income-generating potential than gross potential income, which assumes 100% occupancy and no credit losses.

To calculate Effective Gross Income, follow these steps:

Determine Gross Potential Income (GPI): This is the total rental income a property would generate if all units were fully occupied and paying the market rent.

GPI = (Number of Units × Monthly Market Rent) × 12

Calculate Vacancy and Credit Loss: Estimate the amount of rental income lost due to unoccupied units (vacancy loss) and the expected credit loss (e.g., unpaid rent, bad debts) based on the property's historical or market vacancy rate and credit loss rate.

Vacancy and Credit Loss = GPI × (Vacancy Rate + Credit Loss Rate)

Determine Other Income: Identify and calculate any additional sources of income for the property, such as laundry facilities, parking fees, storage units, or other ancillary revenue streams.

Calculate Effective Gross Income (EGI): Subtract the Vacancy and Credit Loss from the GPI and add any Other Income.

EGI = GPI - Vacancy and Credit Loss + Other Income

Effective Gross Income is a useful metric for investors and property managers because it provides a more realistic estimate of a property's income-generating potential, considering the impact of vacancies, credit losses, and ancillary income sources. EGI can help investors evaluate the performance of a property, make informed decisions about property acquisitions and management strategies, and set appropriate rental rates to maximize income and occupancy.