Definition — What does "Effective Gross Income" mean in real estate?
Effective Gross Income (EGI) is the realistic annual income a rental property is expected to produce after accounting for typical revenue losses such as vacancies and unpaid rent. Unlike potential gross income, which assumes every unit is rented at full market rate, EGI reflects actual cash‑flow expectations and is widely used by investors, property managers, appraisers, and lenders to assess a property’s financial performance.
EGI formula
The standard formula is:
EGI = Potential Gross Rental Income + Other Income − Vacancy Losses − Credit Losses
Component breakdown:
- Potential Gross Rental Income: Total annual rent if the property were 100% occupied at market rents.
- Other Income: Revenue from parking, laundry, storage, pet fees, reimbursements, late fees, etc.
- Vacancy Losses: Income lost from unoccupied units (typically calculated using historical or market vacancy rates).
- Credit Losses: Bad debt from unpaid rent and tenant defaults.
Why EGI matters
EGI is central to real estate decision‑making because it gives a realistic snapshot of income that can be relied on for:
- Property valuation — used to estimate market value and capitalization rates.
- Cash‑flow analysis — helps determine whether net operating income and debt service are coverable.
- Investment comparison — lets investors compare expected returns across deals on an apples‑to‑apples basis.
- Financing — lenders review EGI to underwrite loans and set loan terms.
Real‑world examples (quick calculations)
Example 1 — Multifamily building (20 units at $1,500/mo):
- Potential Gross Rental Income: 20 × $1,500 × 12 = $360,000
- Other Income: $10,000
- Vacancy Losses (5%): $360,000 × 0.05 = $18,000
- Credit Losses: $5,000
- EGI = $360,000 + $10,000 − $18,000 − $5,000 = $347,000
Example 2 — Small office building (10 suites at $2,000/mo):
- Potential Gross Rental Income: 10 × $2,000 × 12 = $240,000
- Other Income: $15,000
- Vacancy Losses (7%): $240,000 × 0.07 = $16,800
- Credit Losses: $3,000
- EGI = $240,000 + $15,000 − $16,800 − $3,000 = $235,200
Example 3 — Retail strip mall (5 stores at $3,000/mo):
- Potential Gross Rental Income: 5 × $3,000 × 12 = $180,000
- Other Income: $8,000
- Vacancy Losses (6%): $180,000 × 0.06 = $10,800
- Credit Losses: $2,000
- EGI = $180,000 + $8,000 − $10,800 − $2,000 = $175,200
How EGI is used in practice
- Budgeting & operations: Managers use EGI to set realistic expense budgets and reserve levels.
- Underwriting: Lenders review EGI to determine debt service coverage ratios (DSCR).
- Valuation: Appraisers apply EGI to calculate net operating income (NOI) and capitalization values.
- Deal underwriting: Investors use EGI to model returns, break‑even points, and sensitivity to vacancy or rent changes.
Tips to maximize EGI
- Minimize vacancies: Improve marketing, lease terms, and tenant retention to lower vacancy loss.
- Cut credit losses: Tighten tenant screening, require guarantees or deposits, and enforce timely collections.
- Boost other income: Add or expand amenities and ancillary revenue streams (parking, laundry, storage, etc.).
- Track metrics: Maintain historical vacancy and collection data to forecast realistic EGI.
Bottom line
Effective Gross Income is a foundational metric for assessing a property’s true revenue potential. By converting theoretical rent into a realistic income figure that accounts for vacancies and bad debt, EGI enables better valuation, underwriting, budgeting, and investment decisions. Accurately calculating and improving EGI is one of the most direct ways to increase a property’s value and long‑term returns.
