Definition
Effective Gross Income (EGI) is the income a property is expected to actually collect after subtracting revenue lost to vacancy, credit loss, and concessions, and then adding other income (like parking, pet rent, storage, RUBS, and fees). EGI is the revenue base used to calculate Net Operating Income (NOI).
How It’s Measured
Investors typically start with Gross Potential Income (GPI)—what the property would earn at market or contract rents if fully occupied and fully collected—then adjust for real-world leakage and add other income streams.
Common formula
- EGI = Gross Potential Income (GPI) − Vacancy Loss − Credit Loss − Concessions + Other Income
What’s Included (and What’s Not)
Typically included in EGI
- Rental income: residential rents, commercial base rent (depending on property type).
- Other income: parking, pet rent/fees, storage, laundry, application/admin fees, RUBS/bill-backs.
- Bad debt/credit loss: collections shortfalls, write-offs (modeled as a reduction).
- Concessions: free rent, move-in specials, waived fees (modeled as a reduction).
Not part of EGI
- Operating expenses: taxes, insurance, payroll, repairs, utilities (those come after EGI to reach NOI).
- Debt service: principal and interest payments.
- CapEx: major replacements and renovations (usually modeled below NOI).
Why It Matters
EGI is where underwriting becomes honest. Two properties can have the same “headline rent,†but very different outcomes depending on vacancy, delinquency, concessions, and the quality of other income. Small changes in EGI flow directly into NOI, which drives value, DSCR, and returns.
Investor Uses
- Bridge from rent roll to NOI: convert gross rents into collectible revenue.
- Stress testing: model softer demand via higher vacancy, higher concessions, or higher credit loss.
- Revenue optimization: track and grow other income (parking, storage, RUBS) without relying solely on rent increases.
- Lender underwriting: DSCR and loan sizing often hinge on realistic EGI assumptions.
Example
A 50-unit property has scheduled rents that total $1,200,000 per year if fully occupied. The underwrite assumes 6% vacancy, 1% credit loss, 1% concessions, and $60,000 in annual other income.
- GPI = $1,200,000
- Vacancy Loss (6%) = $72,000
- Credit Loss (1%) = $12,000
- Concessions (1%) = $12,000
- Other Income = $60,000
- EGI = 1,200,000 − 72,000 − 12,000 − 12,000 + 60,000 = $1,164,000
That $36,000 difference between GPI and EGI is “revenue leakage.†Underestimating leakage is one of the fastest ways to overstate NOI and overpay.
Common Pitfalls
- Confusing economic vs. physical occupancy: high physical occupancy can still hide credit loss and concessions.
- Double-counting other income: avoid counting a reimbursed utility both as income and as a reduction of expense.
- Using pro forma rent without pro forma vacancy: higher rents often come with higher friction (turnover, concessions).
- Ignoring seasonality: monthly leasing cycles can skew trailing results—use comparable periods.
- Not separating one-time fees: application fees can spike during lease-up but normalize later.