How is Effective Gross Income (EGI) calculated?

The calculation of Effective Gross Income (EGI) involves understanding how it reflects the potential revenue from a property minus certain losses due to vacancies and uncollected rent, while also accounting for additional income sources.

Effective Gross Income is derived from Potential Gross Income (PGI), which represents the total revenue a property could generate if occupied fully and at market rates. However, in reality, properties rarely achieve full occupancy due to vacancies and collection losses, which must be accommodated in the calculation.

To arrive at EGI, you start with PGI and subtract the losses incurred from vacancies and collection issues, since these represent the actual income that cannot be collected. Additionally, any miscellaneous income—such as fees from parking, laundry, or other services—can be added back to the EGI because these are sources of actual revenue that contribute to the overall income of the property. Thus, the correct formula becomes PGI minus the vacancy and collection losses, plus any miscellaneous income.

This method provides a more accurate reflection of what a property is actually earning, which is crucial for effective financial planning and assessment by property managers and investors alike.