# EGI: Effective Gross Income

Effective gross income, or EGI, is a forecast of an asset’s income. It isn’t strictly limited to rental payments — any other revenue-generating services at a property are fair game and should be considered.

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## Effective Gross Income

Effective gross income, or EGI, is a forecast of an asset’s income. It isn’t strictly limited to rental payments — any other revenue-generating services at a property are fair game and should be considered.

There are three figures (explored below in detail) you should have ready to calculate your EGI:

Rental gross potential income (GPI)

Other income

Vacancy and credit costs

### Effective Gross Income Formula:

Once you have determined the metrics above, the calculation itself is straightforward:

**EGI = Rental GPI + Other income - Vacancy and credit costs**

## Effective Gross Income Example:

Let’s step into an EGI calculation. Say you own a 100,000-square-foot industrial property. The asking rental rate is $5 per square foot per year. This gives you a $500,000 rental GPI. You then add other income: In this case, we’ll say there are vending machines on-site which generate a combined revenue of $2,000 per year. Finally, based on your knowledge of the industrial market in your area, you know that you can reasonably project vacancy and credit costs of $50,000 per year.

**EGI = $500,000 + $2,000 - $50,000**

**EGI = $452,000**

For more information about how each figure was calculated, refer to the explanations below.

**Gross potential rental income**

To calculate the gross potential rental income, take your asking rates and multiply them by the relevant square footage or unit count. For example, if you have a 20,000-square-foot office property with asking rents of $15 per square foot, you would simply multiply 20,000 square feet by $15, resulting in a gross potential rental income of $300,000.

This can get more complicated, of course. Let’s say that you charge a higher rate for 5,000 square feet of recently renovated space on that building’s second floor. In this case, you would calculate your gross potential rental income by multiplying 15,000 square feet with your standard asking rate of $15 per square foot, then adding in your premium 5,000 square feet with a rate of $20 per square foot — resulting in a GPI of $325,000.

**Other income**

This category of income includes all non-rental income for your property. Common items to include here are parking revenues, storage unit fees, vending machine income, etc. For multifamily properties, this could also include income from laundry machines, pet fees, etc.

**Vacancy and credit costs**

Here’s where things may get a little tricky. As part of your EGI calculations, it’s essential to forecast costs associated with vacancies or credit costs. This basically follows the assumption that a property will rarely sustain full occupancy for a one-year period and, similarly, that rent payments may not always be paid — even if a unit or space is occupied under contract.

If you are an experienced commercial real estate investor, it can be useful to draw upon similar assets to estimate these costs. If not, utilizing current market reports or industry data can be invaluable in your projections.

## Related Questions

### What is effective gross income (EGI) in commercial real estate?

Effective gross income (EGI) in commercial real estate is all the income generated by a property, including rent, tenant reimbursements, and income from sources such as vending machines, laundry machines, and late fees. It can also be defined as a property’s potential gross income, after expenses such as vacancies and credit costs have been subtracted. EGI is an efficient way to estimate a property’s value and cash flow.

In general, effective gross income can be calculated in one of two ways. A simple EGI calculation would only involve taking rental income, adding other income, and subtracting the property’s vacancy. In contrast, a complex EGI calculation would involve more of the factors mentioned above, and would take potential market rental income and subtract loss to lease, vacancy, and credit loss, while adding any other income generated by the property.

For instance, if we use the numbers from the gross potential rent example early in this article, assuming the vacancy was 7% (the national average), and that the property generated $2,000 a month in other income ($24,000/year), we could do a simple EGI calculation like so:

**$300,000 + $24,000 - $21,000 = $303,000**However, if we use a more complex calculation, we might factor in a credit loss of 2% of rent ($6,000) and a loss to lease of $12,000 (for instance, if the owner gave 5 out of the 10 tenants one month of free rent). This EGI calculation would end up looking slightly different:

**$300,000 + $24,000 - $21,000 - $6,000 - $12,000 = $285,000**So, while using the complex calculation is certainly a more exact way to estimate the EGI of a commercial property, both methods are an excellent tool that investors can use to determine whether a property can truly be profitable.

### How is effective gross income (EGI) calculated?

Effective Gross Income (EGI) is calculated by adding Rental Gross Potential Income (GPI) plus Other Income, and then subtracting Vacancy and Credit Costs.

The components used to calculate EGI are Rental GPI, Other Income, Vacancy and Credit Costs.

The formula is: EGI = Rental GPI + Other income - Vacancy and credit costs.

### What are the benefits of using effective gross income (EGI) in commercial real estate?

The benefits of using effective gross income (EGI) in commercial real estate are that it is an efficient way to estimate a property’s value and cash flow. EGI is an essential calculation for an investor because it is used to forecast an asset’s positive cash flow. It is important to know whether or not the property you are considering purchasing can generate enough positive cash flow to cover its operating expenses and turn a profit. EGI may not be the only metric used for this purpose, but it is definitely unique in its inclusion of potential losses caused by vacancies or partial payments. For this reason, many investors find it to be incredibly useful when comparing between potential investments.

Source 1 Source 2### What are the drawbacks of using effective gross income (EGI) in commercial real estate?

The main drawback of using effective gross income (EGI) in commercial real estate is that it can be difficult to accurately calculate. While a simple EGI calculation only involves taking rental income, adding other income, and subtracting the property’s vacancy, a complex EGI calculation would involve more of the factors mentioned above, and would take potential market rental income and subtract loss to lease, vacancy, and credit loss, while adding any other income generated by the property. This can be time consuming and difficult to accurately estimate, and can lead to inaccurate results.

### How does effective gross income (EGI) affect small business financing?

Effective gross income (EGI) is an important metric for small business financing because it is used to forecast an asset's positive cash flow. EGI takes into account potential losses caused by vacancies or partial payments, which can be useful when comparing between potential investments. It is also an efficient way to estimate a property's value and cash flow, which can be used to determine the terms of a loan. For example, lenders may use EGI to determine the loan-to-value ratio, debt service coverage ratio, and other loan terms.