Effective gross income (EGI) is a property's gross potential income minus a vacancy and collection loss allowance, representing a more realistic estimate of actual expected income before operating expenses are deducted. EGI is the intermediate step between GPI and net operating income in a standard investment income analysis.
The EGI formula
| Component | Example |
|---|---|
| Gross Potential Income | $1,000,000 |
| Less: Vacancy allowance (5%) | -$50,000 |
| Effective Gross Income | $950,000 |
What to watch for before committing
Realistic vacancy allowance assumption
Confirm the vacancy allowance used to calculate EGI is realistic for the specific property and submarket, not an unrealistically low assumption.
Collection loss consideration
Understand whether the vacancy allowance also accounts for potential collection losses (uncollected rent from tenant default), not just physical vacancy.
Single-tenant vs multi-tenant application
Recognize EGI calculations matter most for multi-tenant properties, since a single-tenant building's EGI is largely determined by that one tenant's lease and credit.
Historical vacancy trend comparison
Compare the assumed vacancy allowance against the property's actual historical vacancy experience for reasonableness.
Impact on ultimate NOI and valuation
Understand how EGI assumptions flow through to NOI and, ultimately, property valuation via cap rate.
Submarket vacancy rate context
Reference current submarket vacancy rate data when assessing whether a proposed EGI vacancy allowance is reasonable.
When you need to know this
- Evaluating an investment property's realistic income — moving from theoretical maximum to expected actual income
- Underwriting an acquisition — assessing whether proposed vacancy assumptions are reasonable
- Comparing properties on a standardized basis — using EGI as a consistent, more realistic income figure across analyses
- Understanding investment analysis waterfalls — recognizing how EGI flows from GPI toward NOI calculation
Frequently asked questions
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