How do you arrive at the effective gross income of a property?

To determine the effective gross income (EGI) of a property, the correct approach involves deducting an allowance for vacancies from the total gross income. This process accounts for the realistic income a property can generate after factoring in potential losses due to vacancies.

Effective gross income represents the income that is actually expected to be received from the property, making it a crucial figure for assessing the property's financial performance. By taking into consideration the expected vacancy rate, property owners and assessors can better understand the income risk associated with the investment and make more informed financial decisions based on likely cash flows.

Focusing solely on the total gross income without adjusting for vacancies would result in an inflated perception of a property's profitability. Similarly, calculating annual expenses does not directly yield effective gross income since EGI specifically deals with income rather than costs. Additionally, limiting the consideration to only rental payments ignores other potential income streams, such as parking fees or other ancillary revenues, which could contribute to the overall income of the property.