Effective Gross Income (EGI)

What is Effective Gross Income (EGI)?

Well, multiplying the total rent from your property by 12 will not do. In order to find out the exact Earnings, you need to calculate the effective gross Income. It helps you ascertain the exact monthly rent after deducting the maintenance fees, tax, and other monthly expenses on your property.

In simple terms, Effective Gross Income refers to your annual earnings from your different rental properties, excluding the vacancy allowance. You will need to calculate the EGI when you sell your property. Let’s understand the concept with an example.

Effective Gross Income Example

Suppose you are planning to purchase an investment property that features a total of 10 apartments. Each apartment has a rent of $1000. Now, multiplying the rent by 10, you get $10,000.

So, your annual rental income from this property will be $120,000. This is your potential gross income. Basically, you will earn $120,000 from this 10- apartment property given that all apartments are occupied throughout the year.

However, no investor can depend on gross potential income. You will also have to take the vacancy into consideration. For instance, the current Vacancy Rate in the United States is approx 10%. If we take this vacancy rate into account, you will have at least one apartment vacant out of the 10 apartments.

Now, if you multiply the total rental income per apartment by 9 units, you get $9,000. This means your annual gross income from the rent is $106,000. This is your effective gross income. You will understand it better when you own an investment property for years and calculate the effective gross income annually.

Importance of EGI

It is extremely important to take the Effective Gross Income into consideration before purchasing a property. Even the investors that manage to earn 100% of the rental income from the overall apartments subtract the vacancy income from the total cost. As mentioned before, no apartment is rented for the whole year.

Vacancy cost is the prediction of the total period the landowner will be without a tenant in their apartment. Now, before Investing in a property, you need to know its effective gross income. Of course, you are going to have vacant apartments at some point. So, you can calculate the EGI with a standard vacancy rate, which is between 7 and 10 percent. It is important to note that there are multiple ways to grow the rent and income from your property. Here we are not talking about building additional apartments or increasing the rent. You could add some advanced systems and enhance the security of your property to increase the monthly rent.

You could also offer some add-ons to grow your rental income. These add-ons can be parking permits, laundry, internet services, pet fees, vending machines, rental furniture sets, and so on.