Effective Gross Income (EGI)

What is EGI?

Effective Gross Income (EGI) is the total income a rental property is expected to produce after accounting for vacancies and uncollected rent. It reflects the realistic cash inflows available to cover operating expenses and debt service.

EGI formula

EGI = Potential Gross Rental Income + Other Income − Vacancy and Credit (Collection) Losses

Components explained

• Potential Gross Rental Income (PGRI): The total rent that would be collected if every unit were fully leased at the contract rate for the entire period (e.g., monthly rent × 12 months × number of units).
• Other Income: Recurring non-rent revenue generated by the property, such as:
• On-site laundry or vending machines
• Monthly parking or storage fees
• Pet fees and late fees
• Vacancy Losses: Income lost when units are unoccupied between tenants. Usually estimated as a percentage of PGRI based on market conditions or the owner’s historical experience.
• Credit (Collection) Losses: Income not collected from occupied units due to tenant nonpayment or partial payment. Also typically estimated as a percentage of PGRI.

Example

Assume a small building with:
* PGRI = $24,000/year (e.g., $2,000/month)
* Other income = $1,200/year
* Vacancy and credit losses = 8% of PGRI = $1,920

EGI = $24,000 + $1,200 − $1,920 = $23,280

Why EGI matters

• EGI is the starting point for property valuation and cash-flow analysis.
• Net Operating Income (NOI) is calculated from EGI: NOI = EGI − Operating Expenses.
• Investors use EGI to assess whether a property can cover expenses, debt service, and deliver targeted returns.

Estimating vacancy and credit losses

• Use historical performance of the property if available.
• Reference local market vacancy and rent-collection trends.
• For new properties or conservative underwriting, apply market-based percentages (commonly several percent of PGRI) and stress-test different scenarios.
• Separate vacancy and collection losses when possible to refine forecasts.

Practical tips

• Include only recurring, reasonably certain other-income items.
• Be conservative in estimating vacancies and collections to avoid overestimating cash flow.
• Recalculate EGI whenever rents, occupancy trends, or ancillary income sources change.

Conclusion

EGI gives a realistic measure of a rental property’s revenue potential by combining ideal rent receipts with other income and subtracting expected losses. It is a crucial input for NOI, valuation, and investment decision-making.