What is 'Effective Gross Income - EGI'
The amount of income produced by a piece of property, plus miscellaneous income, less vacancy costs and collection losses. Effective gross income is a metric commonly used to evaluate the value of a piece of investment property.
For example, an apartment complex has an income of $500,000 if it is able to rent out all of its apartments (full occupancy). Historically, the complex is unable to fill 20% of its units, meaning that it is unable to collect $100,000 ($500,000 * 0.2). The EGI for the property is $500,000 - $100,000, or $400,000.
BREAKING DOWN 'Effective Gross Income - EGI'
Several factors can influence vacancy costs and collection losses for a piece of property. Investors must estimate the costs of the income lost of what can be generated, but the market may cause this rate to go up or down. When looking to purchase investment property, potential investors use the EGI to determine how much they are willing to pay for the property based on how much they expect to make in earnings. Low EGI and high costs are a sign to think twice about buying.