Effective Gross Income – David Reecher
Effective gross income is the true amount of income generated by a piece of property, which includes the gross income plus any miscellaneous income from the property, minus the lost revenue due to vacancy or unpaid rents. When evaluating the value of a property, effective gross income is important because it provides information about how much income the property will actually generate once rents, vacancy, and collection issues are factored in. If a fully occupied property would bring in $1,000 per month in rent, its gross income is $12,000 per year. If the unit is vacant for a month or the tenant does not pay one month’s rent, $1,000 is lost, making the effective gross income $11,000. Thus, two properties charging the same amount of rent could have drastically different effective gross incomes if their vacancy or collection rates are different.