What does "effective gross income" (EGI) represent in property valuation?

Effective gross income (EGI) is a crucial concept in property valuation, representing the income that a property is expected to generate after accounting for certain realistic factors affecting its income potential. Specifically, EGI is the gross income derived from a property after deducting allowances for vacancies and collection losses. This makes it a more accurate gauge of a property’s income-generating potential than the potential gross income, as it reflects the reality of operating a rental property where not all units may be occupied, and where some rents may not be collected.

By using EGI, property owners and investors can make more informed decisions about the financial performance of their investments. It considers the common issues in real estate, such as tenant turnover, market fluctuations, and economic downturns that can lead to vacancies or uncollected rents. Therefore, EGI provides a clearer picture of the functioning income of a property, which is fundamental for financial analysis and investment strategy.

In contrast, the other options either do not align with the formal definition of EGI or refer to different aspects of income calculation without incorporating the necessary deductions for vacancies and losses.