Calculating Effective Gross Income (EGI)

Hi, this is Frank Chen with REIClub.com, the only site you need as a real estate investor. Today I've got quick video on how to calculate effective gross income (EGI) for commercial real estate investing.

Effective Gross Income (EGI)

The amount of income produced by a piece of property, plus misc income, less vacancy costs and collection issues. 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.

Gross Potential Rent (GPR)

The expected income a property will produce when fully occupied and all rents are collected.

Example:
10 unit apartment
$800/month
$8000/year x 12 months = $96,000

Other Income/Revenues

– laundry facilities
– vending machines
– car wash centers
– additional storage
– personal errand services
– late fees from rent
– parking permits
– covered parking
– etc…

Example:
$1000/mo in additional revenue
$12,000/year

Total Potential Revenues (Gross Income)

GPR + other income = $108,000/year

Vacancy

The vacancy rate is the percentage of all the rental units that are vacant in relation to the total amount of units in the property.

(Total Vacant Units) / (Total Units) = Vacancy Rate

Average vacancy rates are around 5-10%

Credits

Money or percentage of income that is estimated to be lost due to non-payment of rents. Also includes,

– management fees
– maintenance
– compensation

Average Credit Loss is around 5-10%

Owner/Concessions

– free rent for first month
– tenant improvement allowance
– lower rents due to assistance from current tenants
– parking permits
– internet access

EFFECTIVE GROSS INCOME (EGI) Calculation

Gross Income — Vacancy Costs (vacancy rate (%) x income = $ amount) — Credit Loss (i.e. collections, evictions, etc) = Effective Gross Income (EGI)

$108,000 – (.05 x $108,000) = $102,600
$102,600 – (.05 x $108,000) = $97,200
EGI = $97,200 – Concessions

As a real estate investor interested in commercial real estate, you need to be very familiar with all the methods for calculating important values for income producing properties. Not knowing how can potentially cost you thousands in potential income. Practice calculating these values using real deals, and you will start to become more comfortable with the process when its time to make that big investment.

Again, this is Frank Chen with REIClub.com. Please take the time to leave your comments for this video below and please subscribe to our YouTube channel so you'll be automatically notified when we upload more quick video tips for you. Take care and good investing.