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)
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.
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.