The Basic Concept of Effective
Gross Rental Income

The effective gross rental income of an investment property is the true indicator of the real income (before all expenses) produced by the property. This is because it accounts for actual vacancy factor and collection losses associated with the operation of the property.

Example: A three-unit multi-family produces an annual schedule-gross-rental-income of $30,000 and has a 5% vacancy and collection loss allowance. What is the annual effective-gross-rental-income produced by the building?

Effective-Gross-Rental-Income = $30,000 x (1 - 0.05) = $30,000 x 0.95 = $28,500

The significance here is that a shortfall of roughly $1,500 in rental income can be expected per year as a result of vacancies and / or collection losses. This makes the real annual income of the building to be $28,500 and not $30,000 as indicated by the "best case" schedule gross rental income (with no vacancy or collection losses). Also, the effective-gross-rental-income of a property should be used whenever making an offer to purchase an investment property.

For more in-depth information about rental income and cash flow, please visit The Landlord's Library book collection. It's a terrific, one-stop source for practical, comprehensive information on the entire subject of residential landlording.

Return from Effective Gross Rental Income to
Investment Property Cash Flow Analysis