Effective Gross Income (EGI) represents the total income from a property that is anticipated to be realized after accounting for potential losses. The calculation of EGI focuses on estimating the income that will be generated from the property’s rental operations.
To arrive at EGI, you start with the potential gross income, which is the total income the property would generate if it were fully leased at market rent levels. From this figure, you subtract vacancy and collection losses, which account for the income that may not be realized due to tenants not paying rent or unoccupied rental units. This adjustment is crucial as it provides a more realistic estimate of the income that the property will actually bring in over a given period.
This means that EGI gives a clear view of the property's operational profitability by reflecting the income that is expected to be received, rather than just the theoretical potential. Hence, the removal of vacancy and collection losses is essential to ensure that the calculation accurately represents the income that can be expected in practical terms.