Effective gross income (EGI) is the total income a property is realistically expected to collect over a year, calculated as gross potential rent plus other income, minus vacancy and credit loss. It is what an owner actually collects, not what the rent roll promises at full occupancy. EGI is the top line of the net operating income calculation.
How Is Effective Gross Income Calculated?
Effective gross income is calculated by starting with gross potential rent, subtracting vacancy and credit loss, and adding other income. The formula is EGI = Gross Potential Rent minus Vacancy and Credit Loss plus Other Income. Some models also subtract loss to lease, the gap between market rent and in-place rent on existing leases.
Each component isolates a different reality. Per Corporate Finance Institute and PropertyMetrics, gross potential rent is the maximum rent at 100% occupancy and market rates. Vacancy captures unoccupied units. Credit loss captures tenants who occupy but do not pay in full. Other income captures revenue beyond base rent, such as parking, laundry, storage, pet fees, and late fees.
Component | What it captures |
Gross potential rent | Maximum rent at 100% occupancy and market rate |
Less vacancy | Income lost to unoccupied units |
Less credit loss | Rent owed by occupying tenants who do not pay in full |
Less loss to lease | Gap between market rent and lower in-place rent |
Plus other income | Parking, laundry, storage, pet fees, late fees |
The vacancy assumption drives the number. A representative stabilized vacancy allowance for multifamily and commercial property runs in the range of 5% to 10%, per Commercial Real Estate Loans. Underwriting too low an allowance inflates EGI and every figure derived from it.
Why Effective Gross Income Matters
Effective gross income matters because it is the revenue base for net operating income, and NOI drives value. EGI reflects what an owner can reasonably expect to collect rather than the theoretical maximum, so it corrects the single most common overstatement in a deal: assuming full occupancy with zero defaults. Overstating EGI overstates value.
The leverage is direct. NOI equals EGI minus operating expenses, and under the income approach value equals NOI divided by a cap rate. At a 5.5% cap rate, one dollar of EGI that survives to NOI adds roughly eighteen dollars of value. A vacancy assumption set two points too optimistic on a $2,000,000 rent roll adds $40,000 of phantom income and, if it flows to NOI, more than $700,000 of phantom value.
This is why lenders and underwriters normalize EGI before trusting it. They test the vacancy rate against the submarket, strip out non-recurring other income, and confirm credit loss reflects actual collections. A clean EGI is the foundation of a defensible underwriting.
Example
A 50-unit apartment building rents at an average of $1,600 per month, giving gross potential rent of $960,000 per year. Apply a 6% vacancy allowance and a 1% credit loss, then add $48,000 of other income from parking and laundry. The table walks the calculation top to bottom.
Line | Calculation | Amount |
Gross potential rent | 50 units x $1,600 x 12 | $960,000 |
Less vacancy | 6% of $960,000 | ($57,600) |
Less credit loss | 1% of $960,000 | ($9,600) |
Plus other income | Parking, laundry | $48,000 |
Effective gross income | 960,000 - 57,600 - 9,600 + 48,000 | $940,800 |
The property's effective gross income is $940,800. The rent roll advertised $960,000, but $67,200 never arrives once vacancy and non-payment are priced in, and $48,000 of ancillary revenue is added back. EGI is the honest number that feeds NOI.
Variations and Edge Cases
Effective gross income shifts with the income basis and the treatment of ancillary revenue. In-place, trailing, and proforma EGI can differ widely on the same asset, so a stated EGI means little until you know which version produced it and what sits inside other income.
Variant | Treatment |
In-place EGI | Based on current signed leases and actual collections |
Trailing EGI (T-12) | Actual collected income over the last twelve months |
Proforma EGI | Forecast income after lease-up; assumes lower vacancy |
Gross-up adjustment | Occupancy normalized to market before subtracting expenses |
Aggressive other income | One-time fees counted as recurring, overstating the line |
The recurring error is counting non-recurring items, such as a one-time lease termination fee, inside recurring other income. That inflates EGI and every figure built on it. Confirm the income basis before the number enters a model.
Effective Gross Income vs Gross Potential Rent
Effective gross income is often confused with gross potential rent, but they sit at opposite ends of the revenue calculation. Gross potential rent is the maximum rent a property could collect at 100% occupancy and full market rate. Effective gross income is what the property actually collects after vacancy, credit loss, and other income are applied.
The difference is the gap between theory and reality. Gross potential rent is the ceiling; effective gross income is the realistic collection. Using gross potential rent where effective gross income belongs is the fastest way to overstate NOI and, through it, value.
Frequently Asked Questions
What is the formula for effective gross income?Effective gross income equals gross potential rent minus vacancy and credit loss, plus other income. Some models also subtract loss to lease. The result is the realistic annual income a property is expected to collect.
Is effective gross income the same as net operating income?No. Effective gross income is the revenue line before operating expenses. Net operating income is effective gross income minus operating expenses. EGI is the top of the calculation; NOI is the result after expenses are deducted.
What is included in other income?Other income includes revenue beyond base rent, such as parking, laundry, storage, pet fees, and late fees. Only recurring items belong in the figure, because one-time fees counted as recurring overstate effective gross income.
Related Terms
Gross Potential Rent
Net Operating Income
Operating Expenses
Loss to Lease
Cap Rate