What is Effective Gross Income?

What is Effective Gross Income?

Effective Gross Income, or EGI, is the actual income a property generates from rental and other incomes. Use the following formula to calculate EGI:

Gross Potential Rental Income is when 100% of available units are occupied and the property owner earns 100% of the rental income assuming no bad debt plus other income.

Other Income: Examples of other income that a property can generate include parking fees, pet fees, late fees, and storage unit fees.

Vacancy: Vacancy is the income lost due to having space not occupied and paying rent. For a more detailed discussion on the topic, you can also check out our blog on Vacancy here.

Credit Loss: Income that is lost due to tenants not paying rent.  Sometimes this is called bad debt, and typically would be around 1-2% of the rent. If your tenants are less credit-worthy, then this percentage would increase.

How is EGI used in real estate?

Effective Gross Income is an important indicator of the value of a rental property because it allows investors to determine how much income a property is actually generating. Using EGI, investors are able to see if a property is generating enough positive cashflow to cover all operating expenses.

Effective Gross Income vs. Gross Potential Rental Income

The Effective Gross Income reduces the Gross Potential Rental Income by vacancy and credit loss and includes Other Income.  The EGI could be a better gauge of future income instead of Gross Potential Rental Income if the property has greater than average Other Income, Vacancy, or credit loss.

Effective Gross Income vs. Scheduled Gross Income

Scheduled Gross Income, or SGI, is the maximum income a property can generate in a current condition. It is calculated by adding all the monthly rents for occupied spaces, vacant spaces, and other miscellaneous income that a property earns and then multiplying that by 12.  For vacant spaces, you calculate it using current market rental rates.

The Effective Gross Income on the other hand, is what the property actually earns, and can be calculated by subtracting vacancy and collection losses from SGI.

Conclusion

Effective Gross Income is a more accurate measure of a property’s value than Gross Potential Income. This is because effective gross income shows the cashflows a property is actually generating rather than what it could generate at 100% occupancy and market rents. 

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About the Author

Eric Bergin is the founder of TSM. He realized that there was a need for real estate financial models that were more than just generic templates. He wanted to create a personalized product for his customers that would ensure success for them and their company. Please reach out to him if you have any questions regarding discounted cashflows or if he can help you with your modeling needs.