What is Effective Gross Income (EGI)?

Effective Gross Income (EGI) is a key concept in commercial real estate that reflects the total income a property generates after accounting for potential income losses due to vacancies and non-payment of rent. It is derived specifically from Potential Gross Income (PGI), which represents the total income a property could generate if it were fully leased at market rates.

By subtracting vacancy and collection loss from PGI, EGI provides a more accurate representation of the income that a property is expected to generate during a specific period. This calculation is essential for property investors and managers as it helps in assessing the financial performance of an investment, optimizing cash flow, and making informed decisions regarding property management and investments.

The inclusion of both vacancy and collection allowances in the calculation demonstrates an understanding of the practical challenges in real estate operations, where income is not always fully realized due to various factors, such as market conditions or tenant issues. This makes EGI a vital metric for evaluating the profitability of real estate investments.