Certified Pennsylvania Evaluator Practice Exam

How is effective gross income (EGI) calculated?

1. PGI - vacancies and credit losses

2. PGI + miscellaneous income

3. Net operating income plus non-operating expenses

4. Contract rent minus market rent

The correct answer is: PGI - vacancies and credit losses

Effective gross income (EGI) serves as a key component in financial analysis within real estate management and investment. It is computed by adjusting the potential gross income (PGI), which reflects the maximum income a property could generate under full occupancy, for any vacancies and credit losses. In the context of real estate, vacancies refer to the physical absence of tenants, while credit losses consider the income lost due to tenants who do not pay their rent. By subtracting these losses from the PGI, we arrive at the EGI, which provides a more realistic estimate of expected income. This calculation is essential for evaluating the property's financial performance and can inform investment decisions, operational strategies, and overall financial planning for property management. The other options do not accurately describe the calculation of EGI. Adding miscellaneous income to PGI does account for additional revenue streams, but it does not adjust for vacancies or credit losses. Net operating income considers expenses but is distinct from EGI, while contract rent versus market rent is a separate metric valuable in assessing rent adjustments but not related directly to the calculation of EGI. Thus, the first choice correctly describes the method to calculate effective gross income.