Understanding how to calculate the Effective Gross Income (EGI) is essential for investors involved in BRRRR (Buy, Rehab, Rent, Refinance, Repeat) properties. Accurate income calculations help determine the property's profitability and guide refinancing decisions.
What is Effective Gross Income?
Effective Gross Income represents the total income generated from a rental property before deducting expenses. It includes all potential income streams, providing a clear picture of the property's earning capacity.
Components of EGI
- Gross Potential Income (GPI): The maximum income if all units are rented at full price.
- Vacancy Loss: Income lost due to unoccupied units.
- Other Income: Additional income sources like laundry, parking, or fees.
Calculating Effective Gross Income
Follow these steps to calculate EGI:
- Start with the Gross Potential Income.
- Subtract Vacancy Loss to account for unoccupied units.
- Add Other Income from additional sources.
The formula looks like this:
EGI = GPI - Vacancy Loss + Other Income
Example Calculation
Suppose your property has a GPI of $120,000 annually. You experience $12,000 in vacancy loss and earn an additional $3,000 from laundry and parking fees. Your EGI would be:
EGI = $120,000 - $12,000 + $3,000 = $111,000
Importance of Accurate EGI
Calculating an accurate EGI helps investors assess the property's income potential, plan for expenses, and make informed refinancing decisions. It is a vital step in the BRRRR process, ensuring sustainable investment growth.