How is effective gross income calculated?

Effective gross income is an essential concept in real estate that reflects the income generated by a property after accounting for potential losses. To arrive at effective gross income, one begins with potential gross income, which is the total income a property could generate if it were fully occupied and all rent were collected. However, real estate operations often face vacancies and collection losses, which can reduce that income.

Therefore, these losses must be deducted from the potential gross income. Additionally, effective gross income can be increased by including other income streams that might arise from the property, such as fees from amenities or parking. As a result, the correct calculation for effective gross income is the potential gross income minus any vacancy and collection losses, plus other income. This formula ensures that you have a realistic view of the income a property can actually generate, which is vital for investors and property managers in assessing the financial health of a real estate investment.