Glossary
Effective Gross Income (EGI)
Effective gross income (EGI) is the total income a property is expected to collect after deducting vacancy, concessions and credit loss from gross potential rent and adding other income such as parking, laundry or fees. It is the realistic revenue figure from which operating expenses are subtracted to arrive at net operating income.
Formula
Example
A 100-unit property has gross potential rent of $1,872,000. The underwriter deducts 5% vacancy ($93,600), 1% credit loss ($18,720) and $20,000 of concessions, then adds $75,000 of parking and fee income. EGI = $1,872,000 - $93,600 - $18,720 - $20,000 + $75,000 = $1,814,680. Operating expenses are subtracted from this figure, not from gross potential rent, to calculate NOI.
How it is used in underwriting
EGI is where underwriting assumptions about market demand show up in the numbers. Underwriters set vacancy and credit loss using the property's history, the submarket and lender minimums, and they scrutinize other income to confirm it is recurring and supported by the T12. Because operating expenses are measured against EGI in the operating expense ratio, and because many management fees are charged as a percentage of EGI, getting this line right affects several downstream calculations. Lenders typically underwrite EGI conservatively, while equity sponsors may project higher EGI from rent growth, lower vacancy or new income sources.
Other income deserves particular skepticism. One-time items such as lease termination fees, insurance proceeds or a single large late-fee collection should be excluded. Utility reimbursements and ancillary fees should be verified against actual collections, not billing. In commercial real estate, EGI usually includes expense reimbursements from tenants under net leases, which means EGI and operating expenses both rise when costs increase. Comparing EGI across properties without understanding the lease structure can be misleading. Finally, confirm that the vacancy deduction applies to rent that would actually be collected, not to income categories that do not depend on occupancy.
Run the numbers: NOI Calculator
Frequently asked questions
How do you calculate effective gross income?
Start with gross potential rent, the rent if every unit were leased at full rates. Subtract vacancy, concessions and credit loss, then add other income such as parking, storage, laundry, pet fees and, for commercial properties, tenant expense reimbursements. The result is effective gross income.
What is the difference between EGI and NOI?
EGI is the income a property expects to collect before paying operating expenses. NOI is EGI minus operating expenses such as taxes, insurance, utilities, repairs and management. NOI is used for valuation and loan sizing, while EGI is the revenue line that feeds into it.
Is effective gross income the same as gross operating income?
The terms are often used interchangeably, but some practitioners define gross operating income as gross potential rent less vacancy and credit loss, before adding other income. Because definitions vary between firms and textbooks, check how each line is built before comparing figures across offering memoranda or appraisals.
Related terms
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