effective gross income


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effective gross income

The anticipated gross income from a rental property after deducting an estimated amount for vacancies and bad debt.

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If calculated correctly, Loss to Lease entries will have no effect on Effective Gross Income collected on a property.
In most assignments, the monthly gross income is estimated based on the total amount of income the property can produce at 100% occupancy, i.e., potential gross income rather than effective gross income. Allowances for vacancy and collection loss--whether estimated or actual--are seldom deducted unless there are reasons for major differences in occupancy rates.
Given the relative age and condition of the subject property, operating expenses were estimated at 28.7% of effective gross income. Using data from comparable sales and a national investor survey, the overall capitalization rate of the subject property was indicated at 8.50%.
The right side shows that both effective gross income (EGI) and operating expense (OE) relate to the occupancy rate.
Table 1 ABC Multi-Family Realty Trust Quarter Line ($M) 1 Rental revenue from continuing operations $85.0 2 Plus: Property-related ancillary income 3.3 3 Plus/Minus: Straight-lining of rent 0.0 4 Plus/Minus: Adjustment per FASB regulations 0.0 5 Minus: Lease termination fees received (0.0) 6 Subtotal: Effective gross income $88.3 7 Minus: Operating expenses, incl.
Vacancy and collection loss is estimated at 5%, and total operating expenses, including property tax, insurance, maintenance, and management are about 35% of effective gross income.
Table 1 Known facts Building size Price Reported [R.sub.o] Occupancy Market rent Initial estimates Benchmarked expenses This information generates Price [R.sub.o] Implied NOI Benchmarked expenses Implied effective gross income Effective gross income per square foot Known facts 100,000 square feet $10,000,000 11.0% 80% $15.00 per square foot per year Initial estimates $6.50 per square foot per year This information generates $10,000,000 11.00% $1,100,000 650,000 $1,750,000 $17.50
Add all appropriate operating expenses to arrive at the effective gross income. Adjust for vacancy and credit loss to arrive at the required gross income.
Using the illustration presented in table 2 and a land rental rate of 15% of the gross income produces an effective gross income of $10,200.
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 ($60,000/0.12) $500,000