What is Effective Gross Income ?
516 reads · Last updated: December 5, 2024
Effective gross income (EGI) is the Potential Gross Rental Income plus other income minus vacancy and credit costs of a rental property.EGI can be calculated by taking the potential gross income from an investment property, add other forms of income generated by that property, and subtract vacancy and collection losses.
Definition
Effective Gross Income (EGI) refers to the potential gross rental income of a leased property plus other income, minus vacancy and credit costs. It is a crucial metric for evaluating the income potential of a property investment, helping investors understand the actual income capacity of the property.
Origin
The concept of Effective Gross Income originated in real estate investment analysis. As the real estate market evolved, investors needed a more accurate way to assess the actual income potential of properties, leading to the introduction of EGI. It allows investors to predict the net income of a property more accurately by considering vacancy rates and credit losses.
Categories and Features
Effective Gross Income is primarily divided into two parts: potential gross income and other income. Potential gross income refers to the total rental income if the property is fully leased, while other income includes additional revenues such as parking fees and laundry fees. The characteristic of EGI is that it accounts for vacancies and credit losses, making it more practical and reliable than mere potential gross income.
Case Studies
Case Study 1: Suppose a commercial property has a potential gross income of $1 million, other income of $200,000, and vacancy and credit losses of $100,000, resulting in an effective gross income of $1.1 million. Case Study 2: A residential property has a potential gross income of $500,000, other income of $50,000, and vacancy and credit losses of $50,000, resulting in an effective gross income of $500,000. These cases demonstrate how EGI is applied in practice, helping investors better assess the income potential of properties.
Common Issues
Common issues investors face when calculating EGI include accurately estimating vacancy rates and credit losses. Errors can lead to incorrect assessments of a property's income potential. Additionally, overlooking other income sources can result in inaccurate EGI calculations. Investors should carefully analyze market conditions and property characteristics to obtain a more accurate EGI.
