Effective Gross Income
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 total income from a rental property, including potential gross rental income and other income, minus vacancy and credit costs. EGI is a crucial metric for evaluating the return on property investments.
Origin:
The concept of Effective Gross Income originated in real estate investment analysis to provide a more accurate method of income assessment. As the real estate market evolved, investors needed more precise tools to evaluate the actual income potential of properties, making EGI a standard evaluation metric.
Categories and Characteristics:
1. Potential Gross Income: This is the total rental income of a property if fully rented, without considering vacancy and collection losses.
2. Other Income: Includes additional income generated by the property, such as parking fees, laundry fees, and advertising revenue.
3. Vacancy and Credit Costs: Vacancy costs refer to the income loss from unoccupied units, and credit costs refer to the loss from tenants not paying rent.
The characteristic of EGI is that it comprehensively considers all income sources and potential losses of a property, providing a more holistic income assessment.
Specific Cases:
Case 1: A residential building has a potential gross income of $1,000,000, other income of $200,000, and vacancy and credit costs of $100,000. The EGI for this building would be:
EGI = $1,000,000 + $200,000 - $100,000 = $1,100,000.
Case 2: A commercial property has a potential gross income of $2,000,000, other income of $300,000, and vacancy and credit costs of $200,000. The EGI for this property would be:
EGI = $2,000,000 + $300,000 - $200,000 = $2,100,000.
Common Questions:
1. What is the difference between EGI and potential gross income?
Potential gross income is the total income of a property if fully rented, while EGI considers the actual income after accounting for vacancy and credit costs.
2. How can vacancy and credit costs be reduced?
Improving property management, selecting quality tenants, and signing long-term leases can effectively reduce vacancy and credit costs.
