The effective gross income is defined as what?

Effective gross income is defined as the potential gross income generated by a property, adjusted for vacancy and collection losses. This measure accounts for the reality that not all potential income is realized due to factors like unpaid rent or unleased space. Essentially, after considering these inefficiencies, the effective gross income provides a more accurate picture of the income a property can be expected to generate.

Potential gross income represents the total income a property could generate if it were fully leased at market rates, without any deductions. However, in practice, properties often experience vacancies and some level of uncollectible rent, which means that the actual income will fall short of this potential. Therefore, subtracting these factors gives an effective gross income that is more reflective of the property's performance.

Understanding effective gross income is crucial for appraisers and investors, as it lays the foundation for evaluating property performance and cash flow, ultimately influencing investment decisions and valuation methodologies.