Effective Gross Income is calculated by subtracting what from Potential Gross Income?

Effective Gross Income (EGI) is a critical concept in real estate that represents the income a property is expected to generate after accounting for potential losses. The calculation of EGI begins with Potential Gross Income (PGI), which is the total rental income a property could generate if it were fully occupied and there were no collection issues.

To derive Effective Gross Income from Potential Gross Income, it is necessary to subtract vacancy and collection losses. This adjustment accounts for the reality that not all units will be rented at all times due to vacancies, and that some collected rents may be uncollectible due to tenant defaults or late payments. By deducting these losses from the Potential Gross Income, you arrive at a more realistic and achievable revenue figure, which provides a clearer picture of the property's financial performance.

Other options, such as operating expenses, loan repayments, and maintenance costs, are essential for evaluating a property's overall financial health but do not play a role in the calculation of Effective Gross Income from Potential Gross Income. These factors come into consideration later when calculating Net Operating Income or assessing profitability, but they do not directly modify the gross income figure at the initial EGI calculation stage.