Effective Gross Income (EGI)

What Is Effective Gross Income (EGI)?

Effective gross income represents the realistic total income a property actually generates after accounting for vacancy, credit losses, and concessions, plus any ancillary income sources. It is the bridge between the theoretical maximum income (gross potential income) and the actual money hitting your bank account. EGI is the starting point for calculating net operating income and is the most honest top-line revenue figure in your analysis.

The EGI Formula

Effective Gross Income = Gross Potential Income - Vacancy Loss - Credit Loss / Concessions + Other Income. Gross potential income assumes 100% occupancy at market rent. Vacancy loss reflects expected unoccupied time (typically 5–10%). Credit loss accounts for tenants who don't pay (budget 1–3%). Other income includes all non-rent revenue: laundry machines, parking fees, pet rent, storage unit fees, application fees, late fees, vending machines, and utility reimbursements.

Why Other Income Matters

Ancillary income can meaningfully impact property value because it flows directly to NOI. Adding $200/month in parking revenue to a 20-unit building generates $48,000/year. At a 6% cap rate, that $48,000 in additional income adds $800,000 to the property's value. Smart multifamily operators systematically maximize other income through pet rent ($25–50/pet/month), reserved parking ($50–100/spot/month), package lockers, laundry upgrades, storage units, and utility bill-back programs (RUBS — Ratio Utility Billing System).

Why EGI Matters

EGI is the number your actual financial performance should track against. If you underwrote a deal based on EGI of $200,000 and you're only collecting $180,000, you have a 10% income shortfall that cascades through every downstream metric — NOI, debt coverage, cash-on-cash return, and property value. Lenders underwrite loans based on EGI, not gross potential income. Appraisers use EGI in the income approach to valuation. Getting EGI right is essential for accurate deal analysis.

Practical Tips

Always verify EGI against actual rent rolls, bank deposits, and tax returns — never trust a broker's pro forma. Look for discrepancies between listed rents and collected rents (the difference reveals credit loss). Investigate other income line items to ensure they're sustainable and transferable to a new owner. When projecting EGI for acquisitions, use current actual rents rather than asking rents or market rents unless you're specifically underwriting a value-add rent increase. Build your vacancy and credit loss assumptions from local market data, not national averages.