Effective Gross Income

Core Description

• Effective Gross Income (EGI) is the realistic “top-line” revenue a rental property is expected to collect after accounting for vacancy and non-payment, not just what it could earn at full occupancy.
• By starting with Potential Gross Income (PGI), adding recurring other income, then subtracting vacancy loss and credit or collection loss, Effective Gross Income makes properties with different occupancy and fee structures easier to compare.
• Investors, lenders, and property managers rely on Effective Gross Income to diagnose revenue drivers and to build more credible NOI and valuation inputs.

Definition and Background

What “Effective Gross Income” means in plain English

Effective Gross Income (EGI) is the portion of a property’s gross income that is expected to be collectible in the real world. If a building is advertised as “fully leased,” that message can still hide common realities: some units may be vacant at different times of the year, some tenants may pay late or not pay at all, and concessions (like free rent) may reduce what is actually received.

So, Effective Gross Income is best understood as “gross income after typical revenue leakage.” It sits between optimistic revenue and bottom-line profitability:

• PGI (Potential Gross Income) answers: “What could this property earn if everything is rented and everyone pays?”
• Effective Gross Income answers: “What will it likely collect after vacancy and non-payment?”
• NOI (Net Operating Income) answers: “What remains after operating expenses?”

Why the industry adopted Effective Gross Income

As income-property analysis matured, market participants moved away from relying only on scheduled rent and began incorporating vacancy and credit loss assumptions that reflect stabilized operations. Appraisers, underwriters, and institutional investors use Effective Gross Income because it improves comparability:

• A property with high face rents but frequent vacancy may look strong on PGI, yet weak on Effective Gross Income.
• A property with moderate rents but stable occupancy may produce a higher, more dependable Effective Gross Income.

What Effective Gross Income typically includes (and what it doesn’t)

Effective Gross Income commonly includes:

• Apartment, office, or retail base rent that is expected to be collected
• Recurring “other income” tied to operations (parking, laundry, pet rent, storage, service fees, application fees)

Effective Gross Income typically does not include:

• Security deposits (usually a liability, not income, unless legally recognized as income)
• One-time insurance settlements or irregular reimbursements (often treated separately to avoid overstating recurring Effective Gross Income)
• Loan proceeds or tax refunds (not operating revenue)

Calculation Methods and Applications

The standard Effective Gross Income formula

A widely used underwriting identity is:

\[\text{EGI}=\text{PGI}+\text{Other Income}-\text{Vacancy Loss}-\text{Credit Loss}\]

The logic is simple: start with what you could earn, add recurring non-rent income, then subtract what you won’t collect due to vacancy and non-payment.

Step-by-step: how to compute Effective Gross Income for a rental property

Step 1: Estimate PGI using market-anchored rents

PGI is typically based on market rent comps or a stabilized rent schedule rather than current asking rents alone. For example, if a 20-unit property could rent each unit for $1,600 per month at market:

• Monthly PGI = 20 × $1,600 = $32,000
• Annual PGI = $32,000 × 12 = $384,000

Step 2: Add recurring other income

Other income should be recurring and operational, such as:

• Parking income
• Laundry machines
• Pet fees
• Storage rentals

If these total $650 per month:

• Annual other income = $650 × 12 = $7,800

Step 3: Subtract vacancy loss using an assumption that matches your purpose

Vacancy loss is usually estimated by applying a vacancy rate to PGI (or to rent-related income, depending on underwriting conventions). The key is choosing a rate consistent with your use case:

• Budgeting or operations: may use current or trailing vacancy experience
• Valuation or underwriting: often uses a stabilized vacancy assumption

If the vacancy assumption is 6%:

• Annual vacancy loss = $384,000 × 6% = $23,040

Step 4: Subtract credit or collection loss (non-payment, bad debt, delinquencies)

Credit loss captures rent and fees that are billed but not collected (or collected late and written off). If credit loss is assumed at 1% of PGI:

• Annual credit loss = $384,000 × 1% = $3,840

Step 5: Arrive at Effective Gross Income

• Effective Gross Income = $384,000 + $7,800 − $23,040 − $3,840
• Effective Gross Income = $364,920

This Effective Gross Income is the “collectible” gross revenue input typically used before operating expenses are applied.

Where Effective Gross Income is used in practice

Investors: linking Effective Gross Income to NOI and valuation discipline

Effective Gross Income is commonly the revenue base for NOI modeling. Because NOI is often capitalized into value, small differences in Effective Gross Income assumptions can have material implications for valuation outputs.

Lenders: sizing loans and testing coverage

Loan underwriting often uses stabilized Effective Gross Income to reduce sensitivity to a temporary spike in occupancy or unusually strong collections.

Property managers: diagnosing revenue problems

Effective Gross Income helps separate “pricing issues” from “occupancy issues” from “collections issues.” For instance:

• If PGI is strong but Effective Gross Income is weak, vacancy or collections are likely the problem.
• If both PGI and Effective Gross Income are weak, rents may be below market, unit mix may be mispositioned, or demand may have changed.

A quick reference table for related revenue terms

Comparison, Advantages, and Common Misconceptions

Effective Gross Income vs. PGI

PGI is “perfect-world revenue.” Effective Gross Income is “realistic revenue.” Two buildings with the same PGI can have very different Effective Gross Income due to occupancy stability and collections quality.

Effective Gross Income vs. NOI

NOI is downstream from Effective Gross Income:

• Effective Gross Income focuses on revenue collectability.
• NOI incorporates operating cost structure (repairs, payroll, utilities, insurance, taxes, management fees, etc.).

If an investor compares properties using NOI only, they might miss whether performance is driven by unusually low expenses or by stronger Effective Gross Income fundamentals.

Effective Gross Income vs. Gross Rent Multiplier (GRM)

Gross Rent Multiplier is often computed using gross rent (which may resemble PGI or actual rent collected, depending on the source). When vacancy is elevated, GRM can appear attractive because the denominator (gross rent) is overstated relative to collectible income. Effective Gross Income-based analysis is often more robust because it forces vacancy and credit loss into the picture.

Advantages of Effective Gross Income

• More realistic than advertised rent: Effective Gross Income acknowledges vacancy and non-payment as normal business conditions.
• Better comparability: Two properties with different fee structures (parking-heavy vs. rent-only) can be compared more consistently using Effective Gross Income.
• Cleaner bridge to NOI: Effective Gross Income is a common top-line input for operating pro formas and valuation work.

Limitations and pitfalls

• Assumption sensitivity: A 3% vs. 7% vacancy assumption can materially change Effective Gross Income.
• Optimism risk: Effective Gross Income can be overstated by using vacancy or credit loss inputs that are not supported by history or market conditions.
• Other income quality: Not all other income is equally stable. Overstating recurring fees can inflate Effective Gross Income without improving long-term property performance.

Common misconceptions (and how to correct them)

“Effective Gross Income equals cash collected”

Not exactly. Effective Gross Income is an estimate of collectible revenue, typically based on assumptions or stabilized operations. Cash collected in a specific month can be higher or lower due to timing, prepayments, or temporary delinquency spikes.

“Full occupancy revenue is the same as Effective Gross Income”

Full occupancy revenue resembles PGI, not Effective Gross Income. Effective Gross Income explicitly reduces revenue for vacancy and collections losses.

“Vacancy is only physical vacancy”

Vacancy loss in underwriting may also reflect economic vacancy such as concessions (free rent, move-in specials) that reduce effective rent. Ignoring concessions can overstate Effective Gross Income even if units appear fully occupied.

“Other income is always incremental”

Some “other income” items may be embedded in rent comps or be non-recurring. Double-counting can inflate Effective Gross Income and distort comparisons.

Practical Guide

How to use Effective Gross Income correctly in an investor workflow

Separate “valuation mode” from “operations mode”

• Valuation mode: emphasize stabilized Effective Gross Income (market-based rents, typical vacancy and credit loss) to avoid being misled by temporary performance.
• Operations mode: emphasize actual or trailing Effective Gross Income to identify what is happening now and what needs to be addressed.

Build Effective Gross Income from the ground up (not from marketing numbers)

A practical approach:

• Start with unit-by-unit market rent comps to form PGI.
• Add only recurring other income with clear drivers (e.g., $75 per month parking × 20 stalls × expected utilization).
• Apply a vacancy assumption that matches asset class and local market conditions.
• Apply a credit loss assumption consistent with tenant profile and historical collections.

Stress-test Effective Gross Income

Even a simple stress test can clarify risk:

• What happens to Effective Gross Income if vacancy rises by 3 percentage points?
• What happens if credit loss doubles during a weaker employment cycle?

This is not about predicting. It is about understanding sensitivity.

Case study (hypothetical scenario, not investment advice)

Scenario

A small investor is comparing two 12-unit buildings in the same city. Both have similar physical condition and unit sizes, and both advertise the same “annual gross rent.”

Building A (amenity-light)

• Market rent: $1,500 per unit per month
• Other income: $100 per month (mostly laundry)
• Vacancy assumption: 4%
• Credit loss assumption: 0.5%

Building B (fee-heavy)

• Market rent: $1,420 per unit per month
• Other income: $520 per month (parking + storage)
• Vacancy assumption: 8%
• Credit loss assumption: 1.5%

Compute Effective Gross Income for each

Building A

• PGI: 12 × $1,500 × 12 = $216,000
• Other income: $100 × 12 = $1,200
• Vacancy loss: $216,000 × 4% = $8,640
• Credit loss: $216,000 × 0.5% = $1,080
• Effective Gross Income: $216,000 + $1,200 − $8,640 − $1,080 = $207,480

Building B

• PGI: 12 × $1,420 × 12 = $204,480
• Other income: $520 × 12 = $6,240
• Vacancy loss: $204,480 × 8% = $16,358.40
• Credit loss: $204,480 × 1.5% = $3,067.20
• Effective Gross Income: $204,480 + $6,240 − $16,358.40 − $3,067.20 = $191,294.40

Interpretation

On a marketing flyer, Building B may look competitive because “gross income” includes substantial fee lines. Effective Gross Income, however, indicates that higher vacancy and weaker collections assumptions can outweigh those fees. In this simplified comparison, Building A produces a higher Effective Gross Income despite lower other income.

What an investor could do next (process-oriented, not a recommendation)

• Request trailing 12-month rent roll and delinquency reports to reconcile assumptions.
• Check whether Building B’s parking or storage income is contractual and durable or promotional.
• Ask whether concessions are being used to maintain occupancy, which would reduce effective rents and therefore Effective Gross Income quality.

Resources for Learning and Improvement

Learn the language of income property underwriting

• Income capitalization chapters in real estate appraisal textbooks (for how Effective Gross Income flows into NOI and value logic)
• Commercial and multifamily lender underwriting guides (for vacancy, credit loss, and stabilization conventions)

Use public filings to see how professionals describe revenue leakage

• Public REIT supplemental packages and audited financial statements often disclose occupancy, concessions, and same-store revenue drivers that map closely to Effective Gross Income concepts.

Practice templates and habits

• Build a one-page Effective Gross Income worksheet with:
  • Market rent schedule (PGI)
  • Other income by line item (with notes on what drives it)
  • Vacancy loss assumption (and a sensitivity range)
  • Credit loss assumption (and a sensitivity range)
• Compare your modeled Effective Gross Income to trailing financials to identify what is assumption versus observed.

FAQs

Is Effective Gross Income the same as “gross income” on a listing?

No. Listing figures often resemble PGI or a simplified gross number. Effective Gross Income explicitly subtracts vacancy loss and credit loss to estimate collectible revenue.

Should I use actual vacancy or stabilized vacancy for Effective Gross Income?

It depends on purpose. For budgeting and operational decisions, actual or trailing vacancy may be more relevant. For valuation and underwriting, stabilized vacancy is commonly used to avoid overreacting to temporary conditions.

Does Effective Gross Income include security deposits?

Typically no. Security deposits are generally treated as liabilities until they are legally applied or recognized as income under the relevant accounting and lease terms.

How do concessions affect Effective Gross Income?

Concessions like “one month free” reduce economic rent. If concessions are common, treating the property as “100% occupied” can still overstate Effective Gross Income unless the effective rent is adjusted.

Can other income make Effective Gross Income look better than it really is?

Yes, if other income is not recurring, is highly promotional, or is double-counted relative to rent comps. Effective Gross Income is most useful when other income lines are normalized and well-supported.

What is a reasonable credit loss assumption for Effective Gross Income?

There is no single universal number. Credit loss depends on tenant quality, local conditions, lease enforcement, and historical delinquency. A practical approach is to start with trailing performance, then stress-test higher loss rates.

Conclusion

Effective Gross Income is a practical revenue measure that helps bridge the gap between “what a property could earn” and “what it is likely to collect.” By explicitly incorporating vacancy loss and credit or collection loss, Effective Gross Income improves comparability across properties and provides a more credible starting point for NOI analysis. Used carefully, with market-based PGI inputs, well-supported other income, and realistic vacancy and credit assumptions, Effective Gross Income can help identify whether a property’s revenue profile is driven primarily by pricing, occupancy stability, or collections performance before expenses and financing are considered.