Updated · Part of the CRE investment glossary
How effective gross income works
Gross potential rent is what a property would earn if every unit were leased at market rent and every tenant paid in full. Real buildings never collect that. Some units are empty, some tenants pay late or not at all, some leases carry free rent, and some tenants pay less than market under older leases. EGI takes those losses out and adds the income that is not rent: parking, storage, laundry, pet fees, utility reimbursements and late fees.
EGI is the top line of the operating statement that underwriters, lenders and appraisers work from. Operating expenses come out of it to give NOI, and expense ratios and management fees are usually stated as a percentage of it. That makes it the right base for comparing how well two properties turn potential rent into collected income.
The formula
Line by line, for one year:
EGI = gross potential rent − loss to lease − vacancy − concessions − credit loss + other income NOI = EGI − operating expenses
- Gross potential rent (GPR): every unit at market rent for the full year. If GPR is stated at lease rents instead, loss to lease is already out and is not deducted again.
- Vacancy: rent lost on empty units. Credit loss: rent billed but not collected. Concessions: free rent and discounts.
- Other income: recurring non-rent income. Exclude one-time items such as insurance proceeds.
Worked example: a 120-unit property
A fictional 120-unit property has a market rent of $1,500 a month, so gross potential rent is 120 × $1,500 × 12 = $2,160,000. The losses below total $216,000, or 10% of GPR; other income adds $96,000. Operating expenses are $860,000.
EGI is $2,040,000 and NOI is $1,180,000; expenses are 42.2% of EGI. To check it in the NOI calculator, enter $2,160,000 of rent, 10% vacancy and loss, $96,000 of other income and $860,000 of expenses.
| Line | Arithmetic | Amount |
|---|---|---|
| Gross potential rent | 120 × $1,500 × 12 | $2,160,000 |
| Loss to lease | 2.5% of GPR | −$54,000 |
| Vacancy | 5.0% of GPR | −$108,000 |
| Concessions | 1.0% of GPR | −$21,600 |
| Credit loss | 1.5% of GPR | −$32,400 |
| Other income | Parking, storage, fees | +$96,000 |
| Effective gross income | $2,160,000 − $216,000 + $96,000 | $2,040,000 |
| Operating expenses | −$860,000 | |
| Net operating income | $2,040,000 − $860,000 | $1,180,000 |
EGI, gross potential income and the EGI multiplier
Gross potential income is the ceiling; EGI is what is realistic; NOI is what is left after running the building. The gap between GPR and EGI, as a share of GPR, is a quick measure of economic occupancy: here 90% of potential rent is collected.
The effective gross income multiplier (EGIM) divides price by EGI. At a $24,000,000 price, the example property trades at $24,000,000 ÷ $2,040,000 = 11.76 times EGI. Like the gross rent multiplier, it ignores expenses, so use it for quick comparisons between similar properties and rely on NOI and the cap rate for value.
Common mistakes
EGI errors flow straight into NOI and value:
- Deducting loss to lease when gross potential rent was already stated at lease rents.
- Counting one-time income, such as an insurance payout or a lease termination fee, as recurring other income.
- Using physical occupancy for vacancy and forgetting concessions and bad debt.
- Projecting other income growth faster than rent without a reason, such as a new parking program.
General information, not legal, tax or investment advice. Your operating agreement, offering documents, counsel and CPA govern your deal.