What is actual gross income?
Effective gross income (EGI) is the potential gross rental income plus other income minus the vacancy and credit costs of a rental property.
EGI can be calculated by taking the potential gross income of an investment property, adding other forms of income generated by that property, and subtracting vacancy and collection losses.
Understanding Effective Gross Income (EGI)
EGI is a key variable in determining the value of a rental property and the true positive cash flow that property could generate. Rental cash flow is not a simple calculation, but includes all forms of income generated by the property minus the realistic costs associated with rental income. If we look at the variables in the EGI formula, we can see how rental income plays out in the real world.
Key points to remember
- Actual gross income is calculated by adding potential gross rental income to other income and subtracting the vacancy and credit costs of a rental property.
- EGI is essential in determining the value of a rental property and the true positive cash flow it can generate.
- Gross potential rental income is the hypothetical amount that an investor would receive without taking into account the negative situations associated with rental properties.
- Some of the more common examples of other income generated by rental properties include storage units, pet fees, monthly parking permits, and on-site vending machines.
EGI formula explained
Gross Potential Rental Income
Potential gross rental income is the hypothetical amount an investor would receive without any of the rental headwinds that are common in the real world. It assumes that your rental property will be rented every day of the year and that tenants will pay the agreed rent documented in the lease. For example, if the agreed rent is $ 2,000 per month, the potential gross rental income is $ 24,000.
Other income generated by the rental property
What constitutes âotherâ income generated by rental properties? Here are some of the more common sources of cash flow that do not come directly from rent payments:
- Coin-operated washing machines on site
- Vending machines on site
- Monthly parking permits
- Storage units
- Pet fees
- Late fee
In real life, a unit will not always be rented for the whole year. Vacancy fees are the periods between tenants during which the landlord does not receive rent because there is a âvacancyâ. Vacancy costs are a forecast of how long the landlord thinks their home will be tenantless. If the owner has been managing investment properties for some time, this cost can be estimated based on their management experience or industry data.
Credit charges will occur when a rental unit is occupied and the landlord does not receive the agreed rental payment. The tenant has not paid the rent, or has not paid it in full. As with vacancy costs, this amount will be an estimate which can be based on historical data.
Why EGI is important
EGI is essential for the real estate investor because, at the end of the day, they need to know that the property they are considering buying is generating enough positive cash flow to cover the monthly operating expenses as well as any liens or charges that they are buying. ‘they were able to assume. to buy the property.