What is Effective Gross Income (EGI) in Real Estate?
What is Effective Gross Income (EGI) in Real Estate?
Effective Gross Income (EGI) is the net income from all property-related sources before operating expenses, adjusted for vacancy and credit losses. To calculate EGI, start with the annual gross rental income, subtract anticipated vacancy and credit losses, and then add any additional income streams like parking or laundry fees. This figure provides a more accurate representation of a property's income potential than gross rental income alone.
Here's an example of how EGI would be calculated for a hypothetical rental property:
- Gross Rental Income: This is the total potential income from rents if the property is fully occupied and all tenants pay their rent in full. For example, if you have a building with 10 units renting for $1,000 each per month, the annual Gross Rental Income would be:
- 10 units x $1,000/month x 12 months = $120,000
- Vacancy and Credit Losses: This accounts for expected income loss due to vacant units and tenants who fail to pay their rent. If you anticipate a 5% vacancy and credit loss rate, the calculation would be:
- $120,000 x 5% = $6,000
- Other Income: Income generated from other sources besides rent, such as parking, laundry facilities, or vending machines. Let's say this adds up to $5,000 annually.
- Effective Gross Income (EGI): To find the EGI, subtract the Vacancy and Credit Losses from the Gross Rental Income, then add the Other Income:
- EGI = ($120,000 - $6,000) + $5,000 = $119,000
In this example, the EGI would be $119,000 annually.