Effective Gross Income
Definition
Effective Gross Income (EGI) represents the total income generated by an income-producing property after accounting for potential gross income, less anticipated vacancy and collection losses, and including any additional miscellaneous income. The EGI provides a more accurate picture of a property’s potential earning power, critical for financial planning, investment analysis, and lender assessments.
Example
Consider an office building with the following attributes:
- Rents for $12 per square foot.
- Contains 100,000 leasable square feet.
- Expected vacancy and collection allowance: 5%.
- Annual revenue from a concession stand: $1,000.
The calculation of the Effective Gross Income would be as follows:
-
Potential Gross Income:
\( $12 \times 100,000 \) = $1,200,000
-
Vacancy and Collection Allowance (5% of Potential Gross Income):
\( $1,200,000 \times 0.05 \) = $60,000
-
Subtract Vacancy and Collection Allowance:
\( $1,200,000 - $60,000 \) = $1,140,000
-
Add Miscellaneous Income:
\( $1,140,000 + $1,000 \) = $1,141,000
Therefore, the Effective Gross Income for the building is $1,141,000.
Frequently Asked Questions
-
What is Gross Income? Gross Income refers to the total income before any deductions. In real estate, it’s the potential rental income a property could generate without accounting for vacancies, bad debts, or other income adjustments.
-
Why is assessing Effective Gross Income important? It provides a realistic estimate of income, crucial for evaluating a property’s profitability, setting investment goals, and securing loans.
-
What constitutes Miscellaneous Income in EGI calculations? Miscellaneous income can include revenue from parking fees, vending machines, laundry facilities, and any other ancillary services provided on the property.
-
Can EGI calculations vary between different types of properties? Yes, factors such as vacancy rates, collection loss percentages, and miscellaneous income can vary depending on the property type and local market conditions.
-
How does Effective Gross Income affect Net Operating Income (NOI)? EGI serves as the basis for calculating Net Operating Income (NOI). After deducting operating expenses from EGI, investors and analysts determine the NOI, which is crucial for valuing a property and evaluating its financial health.
Related Terms
- Potential Gross Income (PGI): The total gross income a property could potentially generate without deductions such as vacancies and collection losses.
- Vacancy and Collection Loss: Represents the revenue lost due to unoccupied units and tenants’ failure to pay rent.
- Net Operating Income (NOI): Income after deducting operating expenses from the Effective Gross Income. It does not include capital expenditures, taxes, and mortgage payments.
- Capitalization Rate: A rate used to estimate the value of an income-producing property based on its Net Operating Income.
Online Resources
- Investopedia: Effective Gross Income (EGI)
- Real Estate Financial Analysis Tools
- National Association of Realtors
References
- Fisher, J.D., & Martin, R.S. (2020). Real Estate Principles: A Value Approach.
- Brueggeman, W.B., & Fisher, J.D. (2015). Real Estate Finance and Investments.
Suggested Books for Further Studies
- “Real Estate Finance and Investments” by William B. Brueggeman & Jeffrey D. Fisher
- “Real Estate Principles: A Value Approach” by David C. Ling & Wayne R. Archer
- “Commercial Real Estate Analysis and Investments” by David M. Geltner, Norman G. Miller, Jim Clayton, & Piet Eichholtz
