Effective Gross Income (EGI) is the realistic annual revenue a property is expected to produce after adjusting its Potential Gross Income for vacancy, credit loss, and adding recurring ancillary income.
EGI = Potential Gross Income (PGI) − Vacancy Losses − Credit Losses + Other/Ancillary Income.
EGI is the first income step in any valuation or underwriting model. It converts “all-in” rent assumptions into the cash a property will likely collect, and feeds directly into Net Operating Income (NOI), cap-rate valuation, DSCR tests and pro forma cash flows—so getting EGI right sets the foundation for debt sizing, pricing and investment decisions.
PGI is the theoretical maximum rental revenue if every unit/space is leased at contract or market rent for the full year. Use existing lease rents for stabilized properties or market rents for forward-looking pro formas.
Vacancy loss = income lost from physically empty units or suites. Credit loss = income lost from non-payment, bad debt or write-offs. Underwriting often combines them as “vacancy & credit loss” but treat them separately when data allow.
Recurring sources such as parking, laundry, storage, late fees, pet fees, percentage rents and common-area maintenance (CAM) reimbursements (when not netted against expenses) are added to PGI to form EGI.
Adjustments like move-in concessions, free rent months and lease-up discounts reduce collectible income and should be recognized in vacancy/credit loss or as a separate deduction to reach realistic EGI.
Inputs: PGI = $300,000; Vacancy & credit loss = 6% of PGI ($18,000); Other income = $12,000.
EGI = $300,000 − $18,000 + $12,000 = $294,000.
Scenario: 20-unit multifamily, average market rent $1,500/mo. PGI = 20×$1,500×12 = $360,000. Assume market vacancy 5% ($18,000) and credit loss 1% ($3,600). Laundry & parking = $10,000. Concessions (1 unit free month) = $1,500.
Calculation: EGI = $360,000 − ($18,000+$3,600+$1,500) + $10,000 = $346,900.
Decision insight: A 1% change in vacancy (~$3,600) materially affects EGI and downstream NOI; underwriters will sensitivity-test vacancy and concession scenarios before pricing debt or equity.
EGI is sensitive to small changes in vacancy, concessions and other income. Conservative underwriting often applies higher vacancy/credit-loss rates or “haircuts” to ancillary income to stress-test cash flows and loan coverage ratios.
PGI is top-line theoretical rent; EGI is PGI adjusted for expected real-world losses and added recurring ancillary income—EGI is the collectible revenue input to expense and capitalization steps.
EGI − Operating Expenses = NOI. EGI excludes operating expenses; NOI subtracts property-level operating costs (repairs, management, utilities, insurance, taxes) but not debt service or capital expenditures.
“Effective rent” typically refers to per-unit lease-level income after concessions averaged over a term. EGI is portfolio-level effective revenue—both aim to reflect collectable income but at different scopes.
EGI → NOI → Value via cap-rate (Value = NOI / cap-rate). EGI can also produce an income multiplier (EGIM = Price / EGI) for quick comps. Pro formas start with EGI to project cash flow and debt coverage.
Include predictable, recurring revenues: parking, laundry, storage, recurring fees, percentage rents tied to sales, and reimbursements that represent collectible revenue (if not offset as expense).
Exclude non-recurring items (insurance claim proceeds, capital contribution from owner), and expense reimbursements that are better accounted for by reducing operating expenses rather than inflating EGI.
Concessions/free rent reduce collectible rent and should be reflected as deductions from PGI (or added to vacancy/credit loss). Tenant improvement allowances are capital or leasing costs and are excluded from EGI.
Actual EGI reflects current occupancy and collections; stabilized EGI projects full-market occupancy after lease-up. Lenders may require stabilized EGI for valuation but will review actuals for near-term cash flow and loan servicing.
Use commercial data providers (CoStar, REIS), local broker comps, MLS trends and property-level historicals to set vacancy and credit-loss assumptions.
Typical ranges (illustrative): multifamily 3–7%, office 8–15%, retail 5–12%, industrial 3–8%, self-storage 5–10%. Adjust to local market conditions.
Increase assumed vacancy for properties with concentrated lease expirations, weak location, poor condition, or high turnover tenants; reduce for prime assets with strong demand and creditworthy tenants.
Run at least three scenarios: conservative (higher vacancy, haircut other income), base-case (market numbers) and upside (lower vacancy). Examine effects on DSCR and valuation.
Under gross leases the landlord collects rent and pays most expenses; EGI will include full rent and expenses reduce NOI. Under net or NNN leases tenants pay many expenses; some reimbursements (CAM, taxes) can be recorded as other income or offset against expenses depending on reporting practices—ensure consistent treatment.
Percentage rent (retail) and CAM recoveries are typically included in EGI if recurring and verifiable. Be cautious: if CAM is passed through net of a cap, only the collectible portion belongs in EGI.
Short-term leases increase turnover and vacancy risk; long-term leases provide income stability. Factor turnover costs and likely vacancy downtime into vacancy/credit-loss assumptions.
EGI → NOI → available cash for debt service. Lenders use DSCR (NOI / debt service) to size loans; overstated EGI leads to overstated NOI and loan risk.
Appraisers reconcile market approach (cap rates on NOI) and income multipliers (EGIM = Price / EGI) but typically rely on NOI-capitalization for valuation—EGI is a necessary step to get to NOI.
Underwriters often stabilize income assumptions, apply haircuts to ancillary income and may increase vacancy/credit-loss rates to reflect transaction risk and bridge to market norms.
Lenders expect rent rolls, signed leases, historical financials, third-party market reports and evidence of ancillary income collections (e.g., parking contracts, laundry statements).
Don’t count an expense reimbursement as both income and an offset to operating expense—choose a consistent accounting approach.
Don’t underestimate vacancy or ignore concessions; overly optimistic EGI inflates NOI and can sink a deal when cash flow tightens.
Exclude one-off items (sale of equipment, insurance proceeds) from EGI; only include recurring, predictable revenue.
Document vacancy, credit loss, and other income assumptions and cite market sources—unverifiable assumptions reduce lender/appraiser confidence.
Pay providers for market vacancy, rent growth and comps—these are commonly accepted by underwriters and appraisers.
Supplement national data with local broker comps, MLS listings, tax assessments and the property’s rent roll for ground-truthing.
Use public sources for demographic and employment trends that support rent and vacancy assumptions.
Request bank statements, management reports, service contracts (parking/laundry), and third-party receipts to verify ancillary income.
=PGI - (PGI * VacancyRate) - (PGI * CreditLossRate) + OtherIncome
Or cell-based: =B2 - B2*B3 - B2*B4 + B5 (where B2=PGI, B3=Vacancy%, B4=CreditLoss%, B5=OtherIncome)
No. EGI is total collectible revenue before operating expenses. NOI = EGI − operating expenses (excluding debt service and capex).
Either approach is acceptable, but be consistent: concessions are typically reflected as deductions from PGI (or included in vacancy/concession allowances) because they reduce collectible rent.
Annual escalations and CPI clauses should be reflected in future-year pro formas. For a single-year EGI, pro-rate escalations based on their effective dates or use stabilized rent assumptions that include expected escalations.
No. Exclude non-recurring or capital contributions. EGI should reflect recurring, collectible income only.
Start your underwrite with a defensible PGI, document vacancy/credit-loss assumptions with market sources, add verifiable ancillary income, run sensitivity tests and show both actual and stabilized EGI in your memo to illustrate risk.
Study underwriting textbooks and market reports, review sample pro formas from brokers, and practice with spreadsheet models that start at PGI → EGI → NOI → cash flow.
Columns: Item,Value
PGI,$360,000
Vacancy Rate,5%
Vacancy Loss,$18,000
Credit Loss Rate,1%
Credit Loss,$3,600
Concessions,$1,500
Other Income,$10,000
EGI Formula,=360000-18000-3600-1500+10000
EGI,$346,900
