Effective Gross Income ( EGI )
Effective Gross Income, or EGI for short, serves as the baseline for which you will use in calculating the earning capacity of the property. This is the figure you will use to subtract operating expenses from, and consequently determining the Net Operating Income (NOI) of a property.
Effective Gross Income is calculated by taking the Gross Income and subtracting the vacancy and collection costs, plus adding any additional income that the property may generate outside of rental income, i.e. Laundry, Vending Machines, Parking, etc.
The formula for the Effective Gross Income is as follows:
Gross Income – Vacancy Costs (vacancy rate (%) x income = $ amount) – Credit Loss (i.e. collections, evictions, etc) = Effective Gross Income (EGI)
For example, using the same property information above:
Gross Income: $120,000
(minus)Vacancy Rate (20%): $24,000
(minus) Credit Loss (2%): $2400
(plus) Additional Miscellaneous Income (Laundry, Parking, etc.): $3500
=Effective Gross Income (EGI): $97,100
You need to understand how to calculate the effective gross income of a property as this will serve as your baseline for subtracting operating expenses and calculating the Net Operating Income of the property.
Additional income that a lender considers when assessing the loan application of a potential borrower.
