Effective gross income (EGI) is the money an apartment building actually collects in a period, before operating expenses. Start with gross potential rent, subtract vacancy, concessions and bad debt, then add other income like laundry, parking and fees. What is left is EGI. Subtract operating expenses from it and you have net operating income.
EGI matters because it is the first number in your NOI that comes from reality instead of the rent roll's best case. Here is how to build it, check it and keep it honest.
What Is Effective Gross Income?
EGI answers one question: how much cash did this building really bring in? It is lower than the rent on paper because units sit empty, some residents get free rent, and some rent never gets paid. It is higher than rent alone because buildings earn money from other places too.
Investors also search for it as "EGI real estate," but the idea is the same in any property type. In multifamily it sits in the middle of every operating statement: potential income at the top, EGI in the middle, then expenses, then NOI.
The Effective Gross Income Formula
Use this order every time:
- Gross potential rent (GPR): every unit at its full rent for the whole period.
- Minus vacancy loss: rent on units that were empty.
- Minus concessions: free rent and move-in discounts you gave to sign leases.
- Minus credit loss (bad debt): rent you billed and will not collect.
- Equals net rental income.
- Plus other income: laundry, parking, storage, pet and application fees, utility reimbursements.
- Equals effective gross income.
In short: EGI = GPR - vacancy - concessions - credit loss + other income. Then NOI = EGI - operating expenses.
If you only want the final step done for you, our NOI calculator takes income and expenses and returns NOI and the expense ratio.
Effective Gross Income Example for a 40-Unit Building
These numbers are illustrative, not a real building. Say you own 40 units that each rent for $1,500 a month.
| Line | Annual amount |
|---|---|
| Gross potential rent (40 x $1,500 x 12) | $720,000 |
| Vacancy loss | -$36,000 |
| Concessions | -$6,000 |
| Credit loss | -$4,000 |
| Net rental income | $674,000 |
| Other income (laundry, parking, fees) | +$18,000 |
| Effective gross income | $692,000 |
| Operating expenses | -$290,000 |
| Net operating income | $402,000 |
Two things to notice. The building lost $46,000 of its $720,000 potential rent, so it collected about 93.6% of it. That ratio has a name: economic occupancy. And a dollar of EGI is worth more or less depending on the expenses behind it, which is why net operating income vs net income is worth understanding before you compare two buildings.
Gross Potential Rent vs Effective Gross Income
Gross potential rent is the ceiling. Effective gross income is the floor you actually stand on. The first is what the building could earn with perfect leasing and perfect collections. The second is what it earned.
Here is how they differ:
| Gross potential rent | Effective gross income | |
|---|---|---|
| What it measures | Full rent on every unit | Cash actually collected, plus other income |
| Includes vacancy and concessions? | No, it ignores them | Yes, they are subtracted |
| Includes other income? | No | Yes |
| Who it helps | Pricing and market comparison | Valuation, lending and budgeting |
If you want the top of that table in detail, see our guide to gross potential rent. The gap between the two lines is your leak. A building that loses 6% to vacancy and another 2% to concessions and bad debt has a different problem than one that loses 2% in total, even if both advertise the same rents.
What Counts as Vacancy, Concessions and Credit Loss?
Each deduction tracks a different failure, so keep them on separate lines.
- Vacancy loss is rent on units that were empty. It includes the days a unit sits between residents, so slow turns show up here.
- Concessions are the discounts you gave to sign a lease. They reduce collected rent even when the unit is full. Our guide to apartment concessions covers when they pay for themselves.
- Credit loss is rent billed but never collected. It is the bad-debt line, and it grows when screening and collections slip.
Mixing them hides the cause. If the three sit in one "loss" number, you cannot tell whether you have a leasing, pricing or collections issue. You can also compare the total against economic occupancy, which rolls all three into one percentage.
What Goes in Other Income?
Other income is revenue from the building that is not base rent. Common lines in an apartment building:
- Laundry and vending
- Parking, garages and storage
- Pet rent and pet fees
- Application, late and lease-break fees
- Utility reimbursements and billbacks
Count what you collect, not what you charge. Leave out one-time items such as insurance proceeds, a gain on a sale or a security deposit you are holding, because none of them repeat. Fannie Mae's own table lists insurance proceeds, security deposits collected and gain on sale among the items that do not count toward a property's underwritten income.
How Lenders Underwrite Effective Gross Income
A lender will not take your EGI at face value. In its Multifamily Guide, Fannie Mae builds underwritten net cash flow in the same order as above: gross potential rent, then physical vacancy, concessions and bad debt, then net rental income, then other income, which together make effective gross income. Operating expenses come off after that.
Three things from that table are worth knowing as an owner:
- Gross rental income uses actual rents for occupied units and market rents for vacant ones, taken from a current rent roll.
- Concessions are listed as their own deduction, defined as forgone rental income from incentives such as free rent or a move-in allowance.
- For conventional loans, the table has the vacancy, concessions and bad debt deductions total at least the greater of the shortfall in trailing three-month collections (annualized) against gross potential rent, or 5% of gross potential rent.
That last point means a building with very low losses on paper can still be underwritten with more. Fannie Mae revises its guide over time, so confirm current terms with your lender before you rely on any of this.
How to Raise Effective Gross Income
You raise EGI by shrinking the leaks and adding real income, not by pushing rents past what the market accepts.
- Cut vacant days. Faster turns and pre-leasing put rent back on the line.
- Use concessions on purpose. Track what each one costs against the lease it signs.
- Screen and collect consistently. Credit loss falls when the process is the same for every resident.
- Add other income that residents want. Parking, storage and pet programs earn without raising base rent.
- Report it monthly. A clean owner report shows each line, so leaks appear in weeks, not at year end.
We manage apartments in Reno, Sparks, Carson City and Lake Tahoe, and these are the lines we watch on every monthly report.
Common Mistakes When Calculating EGI
- Using the budget instead of collections. EGI is what came in. Pull it from the ledger.
- Netting concessions into rent. Keep the line separate so you can see their cost.
- Counting one-time income. Insurance proceeds and sale gains are not recurring income.
- Forgetting that "vacant" includes turn time. A unit being repaired is still earning nothing.
- Comparing EGI across buildings without expenses. Two buildings with the same EGI can have very different NOI.
