Effective Gross Income

What is Effective Gross Income (EGI)?

There’s big money-making potential with an investment rental property. However, determining how much you’ll actually make isn’t as simple as multiplying the monthly rent by 12. To understand your true cash flow, you’ll need to keep an eye on your effective gross income (EGI) about your net operating income, which is what you’re left with when you pay maintenance fees, property tax, and any other expenses.

Effective Gross Income (EGI) Formula Explained

Gross Potential Rental Income

Gross potential rental income is the hypothetical amount an investor would receive without any of the rental headwinds that are commonplace in the real world. It assumes that your rental property will be rented every day of the year and that renters will pay the agreed to rent documented in the lease. For example, if the agreed to rent is $2,000 a month, the gross potential rental income is $24,000.

Other Income Generated by the Rental Property

What constitutes “other” income generated from rental properties? Here are some of the most common sources of cash flow not derived directly from rental payments:

• On-premise coin-operated laundry machines
• On-premise vending machines
• Monthly parking permits
• Storage Units
• Pet Fees
• Late Fees

Sample EGI Calculation

A rental property charges a monthly rent of $1,500. The property operates laundry machines, parking bays, and vending machines, each generating $3,500, $4,000, and $3,000, respectively, for the year. Assuming that the property was not occupied for two months out of the year, the EGI computation would be;

• Potential Gross Income: $1,500 x 12 months = $18,000
• Other Income: $3,500 + $4,000 + $3,000 = $10,500
• Allowances for Bad Debts and Vacancies: $1,500 x 2 months = $3,000

Hence, the EGI would be ($18,000 + $10,500) – $3,000 = $25,500

Credit Costs

Credit costs will occur when a rental unit is occupied, and the owner does not receive the agreed-upon rental payment. The renter has not paid the rent or has not paid it in its entirety. As with vacancy costs, this amount will be an estimate that may be based on historical data.