What Is Effective Gross Income (EGI)?
What is effective gross income? It's what a property actually brings in—not the theoretical maximum, but the real number after accounting for vacant units and tenants who don't pay. Formula: Gross Potential Income - Vacancy & Credit Loss + Other Income = EGI. If a 12-unit building could generate $216,000/year at full occupancy (gross potential income), but you assume 7% vacancy and credit loss ($15,120) and earn $9,600 in laundry and parking income, EGI = $216,000 - $15,120 + $9,600 = $210,480. That's the number you use to calculate NOI—subtract operating expenses from EGI and you have your net operating income. EGI matters because sellers love to quote gross potential income. It makes the property look better than reality. EGI strips out the fantasy and adds back the extras, giving you the honest revenue picture you need for deal analysis.
Effective Gross Income (EGI) is the realistic total income a property generates after subtracting vacancy and credit losses from gross potential income and adding other income sources like laundry, parking, and fees—the actual revenue a property produces before operating expenses.
At a Glance
- What it is: Realistic property income after vacancy/credit loss, plus other income
- Formula: EGI = Gross Potential Income - Vacancy & Credit Loss + Other Income
- Why it matters: Key input for NOI calculation—the foundation of property valuation
- Typical vacancy assumption: 5–10% for stabilized multifamily; higher for lease-up or distressed
- Other income examples: Laundry ($50–$75/unit/month), parking ($50–$150/space/month), pet fees, storage
EGI = Gross Potential Income - Vacancy & Credit Loss + Other Income
How It Works
EGI bridges the gap between what a property could earn in a perfect world and what it actually earns in reality. The calculation has three components, each requiring careful estimation.
Gross potential income (GPI). Start with the maximum possible rental income—every unit occupied at current market rent for 12 months. For a 20-unit building with rents averaging $1,200/month: $1,200 x 20 x 12 = $288,000 GPI. Important: use market rents, not contract rents. If a tenant is paying $1,050 on a unit that should rent for $1,200, use $1,200 for GPI. The difference ($150/month loss to lease) gets captured in the vacancy and credit loss deduction.
Vacancy and credit loss. This deduction accounts for two realities: units will be empty sometimes, and some occupied tenants won't pay. Vacancy loss: estimate based on market vacancy rates and the property's historical performance. A stabilized Class B apartment in Charlotte, North Carolina might use 5–6%. A Class C property in a softer market: 8–12%. Credit loss: typically 1–2% of GPI for well-screened tenants, higher for properties with weaker tenant profiles. Combined, vacancy and credit loss usually runs 5–10% of GPI for stabilized properties. During lease-up or in distressed situations, it can hit 15–25%.
Other income. Revenue beyond base rent: coin-operated laundry ($50–$75/unit/month), covered parking ($50–$150/space/month), pet rent ($25–$50/pet/month), storage units ($50–$100/month), application fees, late fees, and vending machines. Other income can add 3–8% to a property's total revenue. Some pro formas bury other income assumptions—always verify these are realistic and sustainable.
From EGI to NOI. Once you have EGI, subtract total operating expenses—property taxes, insurance, management, maintenance, utilities, reserves—to arrive at NOI. NOI is the basis for property valuation (cap rate = NOI / Price) and debt service analysis. If your EGI estimate is wrong, everything downstream is wrong.
Real-World Example
Calculating EGI for a 16-unit apartment building in Raleigh, North Carolina.
Maria is analyzing a 16-unit building. Unit mix: eight 1BR units at $1,100/month and eight 2BR units at $1,350/month. Step 1—Gross Potential Income: (8 x $1,100 x 12) + (8 x $1,350 x 12) = $105,600 + $129,600 = $235,200 GPI.
Step 2—Vacancy and Credit Loss: Raleigh's multifamily vacancy rate is running about 6%. Maria adds 1.5% for credit loss (the property has a moderate tenant profile). Total deduction: 7.5% x $235,200 = $17,640.
Step 3—Other Income: The property has an on-site laundry room generating $800/month ($9,600/year), 4 covered parking spaces at $75/month ($3,600/year), and pet rent from 6 tenants at $35/month ($2,520/year). Total other income: $15,720.
EGI = $235,200 - $17,640 + $15,720 = $233,280. Compare this to the seller's marketing flyer, which quoted $235,200 (GPI with no vacancy assumption and no other income detail). Maria's EGI is $1,920 less—not dramatic in this case, but in deals with higher vacancy or no other income, the gap between GPI and EGI can be 10–15% of revenue. That difference can turn a profitable deal into a money-loser.
Pros & Cons
- Provides realistic income picture—strips out vacancy and credit loss fantasy
- Incorporates all revenue streams, not just rent
- Direct input for NOI calculation—the foundation of commercial valuation
- Forces you to make explicit assumptions about vacancy and credit risk
- Easy to compare across properties when calculated consistently
- Accuracy depends entirely on vacancy and credit loss assumptions—garbage in, garbage out
- Other income can be overstated on seller pro formas
- Historical vacancy may not predict future performance in changing markets
- Doesn't account for concessions (free month's rent) unless explicitly deducted
- Loss to lease (below-market rents) complicates GPI estimation
Watch Out
- Don't trust the seller's vacancy assumption: Sellers routinely use 3–5% vacancy on pro formas even in markets running 8–10% actual vacancy. Use market data from local property managers, CoStar, or apartment association reports. Your vacancy assumption should reflect reality, not optimism.
- Verify other income in person: A pro forma claiming $1,200/month in laundry income needs verification. Visit the property. Check the machines. Review actual bank deposits. Sellers sometimes inflate other income to boost EGI and justify a higher price.
- Account for loss to lease: If current tenants are paying below market rent, GPI should still use market rents—but recognize that raising rents to market takes time and may cause turnover. Your year-one EGI may be lower than the stabilized EGI you're projecting.
- Credit loss in rough neighborhoods: In properties with weaker tenant profiles, credit loss can run 3–5% of GPI—not the 1–2% used in nicer areas. Factor in the cost of evictions ($2,000–$5,000 each in legal fees and lost rent) when estimating credit loss.
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The Takeaway
Effective Gross Income tells you what a property actually earns—not the fantasy number on a marketing flyer. Calculate it yourself: Gross Potential Income minus realistic vacancy and credit loss, plus verified other income. This is the starting point for NOI and everything that follows—cap rate, valuation, debt coverage. If you get EGI wrong, every financial metric downstream is wrong too. Always use market-based vacancy assumptions, verify other income with actual records, and account for credit loss based on the tenant profile. EGI is where honest deal analysis begins.