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Definition: Effective Gross Income
Effective Gross Income is often used in the residential property industry and is used to determine the value of a property when given on rent. Quite often, the rental amount received from properties is not the single factor taken into consideration in order to determine the worth of a property. Other aspects such as vacancy percentage in the apartment complex, and an allowance for bad debts add on to the rent of a unit.
The following are the steps to calculate the EGI –
1. Calculate the potential gross income. If the monthly rental per flat in an apartment is Rs.20,000 and there are 12 flats in the apartment, then the potential gross income is Rs.20,000 x 12 = Rs.2,40,000
2. Other income over and above this are estimated, such as parking fees, maintenance etc.
3. Deduct whatever bad debt allowances there may be and multiple by a factor that accounts for vacancies. For example, if each flat is expected to stay empty for 1 month out of each year, subtract Rs.2,000 for each flat from the original Rs.2,40,000