Effective Gross Income (EGI)
Candlefocus EditorGross potential rental income is the hypothetical amount an investor would receive if their property was leased out and fully occupied. This amount excludes the negative factors that are typically associated with rental properties, such as vacancies and bad tenants. Therefore, it is important for investors to avoid basing their investment solely on potential rental income.
Other income generated from rental properties includes income generated from storage units, pet fees, on-premise vending machines, and monthly parking permits. This income is typically not included in the calculation of gross potential rental income and is important to consider when making investment decisions.
When subtracting vacancy and credit costs from the total, it is important to take into account the actual vacancy rates and reasonable credit costs associated with a property. Reasonable credit costs are those terms an investor would be willing to accept when going through the leasing process. Reasonable credit costs should include a reasonable security deposit, credit score requirements, and other terms of a contract.
The EGI is an important concept to consider when evaluating investment opportunities. It will provide investors with a more realistic view of the return on the investment associated with a rental property. EGI takes into account the potential rental income, other income sources, and reasonable credit costs. Therefore, investors can accurately estimate the true positive cash flow their rental property can be expected to generate.