What is Effective Gross Income?

Effective Gross Income (EGI) is defined as the gross income of a property after adjustments are made for potential vacancies and collection losses. In other words, it reflects the income a property is realistically expected to generate, factoring in the reality that not all rental income will be collected due to vacancies or tenants failing to pay.

By focusing on the adjustments made for vacancy rates and bad debt, EGI provides a more accurate picture of an asset's financial performance than gross income alone. The gross income would not take these factors into account, which can lead to overestimations of a property's actual income potential. Understanding EGI is crucial for appraisers and assessors because it serves as a foundational figure from which to calculate net operating income and assess the investment value of a property.

The incorrect options either misinterpret or misrepresent the components that contribute to the calculation of Effective Gross Income. For example, some describe total income without considering adjustments for operational realities, emphasizing the importance of EGI in producing an honest and realistic assessment of income generation within a property.