How do you calculate effective gross income?

Effective gross income is calculated as the potential gross income minus vacancy and collection loss. This measurement is crucial for understanding a property's revenue potential because it considers the realistic income that a property is likely to generate after accounting for factors such as unoccupied units and tenants who do not pay rent.

Potential gross income represents the total income a property would generate if it were fully rented and there were no collection issues. However, in reality, properties often face vacancies and tenants may fail to pay their rent. By subtracting these losses from the potential gross income, the effective gross income offers a more accurate picture of the income the property is expected to produce.

This calculation is essential for property owners and investors when assessing profitability and making informed financial decisions. By focusing on effective gross income, stakeholders can better estimate their cash flow and set appropriate budgets for operating expenses, investments, or improvements.