If calculated correctly, Loss to Lease entries will have no effect on Effective Gross Income
collected on a property.
In the remaining three methods for deriving an overall capitalization rate--band of investment using land and building, derivation using an effective gross income
multiplier and a net income ratio, and the debt coverage ratio model--the only item explicitly identified is one year's net income.
The right side shows that both effective gross income
(EGI) and operating expense (OE) relate to the occupancy rate.
0% Net operating income $700,000 Net operating income as percentage of Year 1 effective gross income
4% of effective gross income
for the conventional apartment, including other income ($3,294/unit), and initial expenses at 58.
Another popular technique is applying a percentage (often determined by a public jurisdiction) to the potential gross income (PGI) or the effective gross income
(EGI) of the improved submerged land site.
Effective gross income
multipliers and expense ratios (all property types)
Add all appropriate operating expenses to arrive at the effective gross income
The compensation for the management company is typically expressed as a percentage of the effective gross income
, or a flat fee, or a combination of both.
PGI = Potential gross income V&RL = Vacancy and rent loss EGI = Effective gross income
OE = Operating expenses NOI = Net operating income DS = Debt service + interest BTCF = Before-tax cash flow TAXES = Federal and state income taxes ATCF = After-tax cash flow
The effective gross income
multiplier (EGIM) and potential gross income multiplier (PGIM) should be compared with market norms for the property type.
Potential rental income ("net rent") $ 72,500 Potential expense recoveries Properly tax (pass through to tenants) $30,935 Other expense (pass through to tenants) + $21,565 Total (pass through to tenants) $ 52,500 Potential gross income (PGI) $125,000 Less vacancy and credit loss [at] 10% - $ 12,500 Effective gross income
(EGI) $112,500 Less operating expenses Property tax (total) $ 30,935 Other operating expense (total) + $ 21,565 Total operating expenses $ 52,500 Net operating income (NOI) $ 60,000 Indicated market value ($60,000/0.