Effective Gross Income (EGI)

Effective gross income (EGI) is the amount of money a property owner receives from rental income after deducting certain expenses. These expenses can include property taxes, insurance, and maintenance costs. EGI is used to calculate the debt service coverage ratio (DSCR), which is a measure of a property's ability to repay its debt. The higher the EGI, the better the DSCR, and the more likely a lender will be to approve a loan for the property.

There are a few different ways to calculate EGI. One common method is to add up all of the rental income from the property and then subtract any expenses that are directly related to the rental activity. These expenses can include property taxes, insurance, and maintenance costs. Another method is to use the gross rent multiplier (GRM). The GRM is a ratio that compares the sale price of a property to its annual rental income. To calculate the GRM, divide the sale price of the property by its annual rental income.

Once you have calculated EGI, you can use it to calculate the DSCR. The DSCR is a ratio that compares the net operating income (NOI) of a property to its debt service. The NOI is the amount of money a property owner receives after deducting all expenses from the rental income. The debt service is the amount of money a property owner pays each month to service their debt, such as mortgage payments. To calculate the DSCR, divide the NOI by the debt service.

The DSCR is an important metric for lenders to consider when evaluating a loan application. A high DSCR indicates that a property is able to generate enough income to cover its debt payments. This makes it a less risky investment for the lender. A low DSCR, on the other hand, indicates that a property may not be able to generate enough income to cover its debt payments. This makes it a riskier investment for the lender.

Effective gross income is an important metric for property owners and lenders to understand. It can be used to calculate the debt service coverage ratio, which is a measure of a property's ability to repay its debt. The higher the EGI, the better the DSCR, and the more likely a lender will be to approve a loan for the property.