Effective Gross Income
Effective gross income (EGI) is the total revenue a real estate property is expected to generate after subtracting vacancy allowances and credit loss from gross potential income, representing the realistic income available to cover operating expenses and produce net operating income before financing costs.
Gross potential income (GPI) represents the maximum revenue a property would generate if every unit were occupied at market rent for the full year with no collection losses. In practice, no property operates at 100% occupancy indefinitely, and some tenants pay late or default. Effective gross income adjusts for these realities to produce a more realistic and conservative revenue estimate.
The standard EGI calculation begins with gross potential rent — all scheduled base rents at prevailing market rates assuming full occupancy — and adds other income sources such as parking fees, laundry income, storage charges, tenant reimbursements, and ancillary service revenues. From this gross potential income, the analysis deducts a vacancy and credit loss allowance — typically expressed as a percentage of GPI — to arrive at effective gross income.
Vacancy and credit loss assumptions are among the most consequential inputs in a real estate pro forma. For a stabilized Class A multifamily property in a supply-constrained urban market, a 5% vacancy and credit loss allowance may be appropriate. For a suburban office building with a concentrated tenant roster and near-term lease expirations, a 15% to 20% allowance may be more realistic. Experienced underwriters calibrate these assumptions to market vacancy trends, the subject property's historical performance, lease expiration schedules, and tenant credit quality.
Once EGI is established, operating expenses — property management fees, insurance, real estate taxes, maintenance, utilities, and reserves for replacement — are deducted to arrive at net operating income (NOI). NOI divided by the market capitalization rate produces an estimate of property value under the income approach to appraisal, making EGI estimation a foundational step in investment underwriting.
For investors in real estate investment trusts (REITs), understanding EGI dynamics across a portfolio helps explain revenue trends reported in same-store sales comparisons. A REIT reporting rising same-store NOI may be benefiting from a combination of rent growth and improving occupancy — both of which flow through the EGI line — and distinguishing between these sources of growth is important for assessing sustainability.