Effective Gross Income: The Rent Number That Underwriting Actually Uses
Learn what effective gross income is, how vacancy and other income adjust gross rent, and why EGI is the starting point for NOI and cap rate.
By David Chen, Buy-and-Hold Investor · Last reviewed: August 11, 2026 · 7 min read
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Where EGI Sits in the Analysis
Effective gross income, or EGI, is the realistic income a property collects after accounting for vacancy and credit loss, plus any income beyond rent. It sits between gross potential rent at the top and net operating income further down.
Getting EGI right matters because every metric below it inherits the number. NOI, cap rate, DSCR, and cash flow all build on EGI, so an inflated income assumption at the top quietly overstates the entire deal.
Effective Gross Income Formula
EGI = Gross Potential Rent - Vacancy & Credit Loss + Other Income
Gross potential rent is what the property would collect if every unit were rented at market rent with zero vacancy for the full year. That is the theoretical ceiling, not reality.
Vacancy and credit loss reduce that ceiling to reflect empty units, turnover gaps, and tenants who do not pay. Other income adds back money the property earns beyond base rent, such as parking, laundry, storage, pet fees, or late fees.
What Counts as Other Income
- Parking or garage fees charged separately from rent.
- Coin or card laundry revenue in multifamily buildings.
- Storage unit or locker rental.
- Pet rent and pet fees.
- Application fees, late fees, and utility reimbursements where allowed.
Worked Example
A fourplex has gross potential rent of $60,000 per year. You apply a 7% vacancy and credit loss allowance, which subtracts $4,200. The building also earns $1,800 in laundry and $1,200 in parking, for $3,000 of other income.
EGI is $60,000 minus $4,200 plus $3,000, or $58,800. That figure, not the $60,000 headline, is what you carry into the NOI calculation. Underwriting on the full $60,000 would overstate NOI and make the cap rate look better than it is.
Common Mistakes
The biggest error is skipping vacancy because a unit is currently occupied. Even a great property turns over eventually, and lenders expect a vacancy line regardless of current occupancy.
The second is double-counting income that is actually a reimbursement of an expense, or being overly optimistic about ancillary income that has not been proven. Keep EGI conservative, and let the rest of the analysis benefit from an honest top line.
Frequently Asked Questions
Is effective gross income the same as net operating income?
No. EGI is income after vacancy and other income, but before operating expenses. Net operating income is EGI minus operating expenses. EGI is the top of the income section and NOI is the bottom.
What vacancy rate should I use for EGI?
Use a realistic local figure rather than zero. Many investors use 5% to 8% for stable residential markets and adjust higher for properties with frequent turnover or softer demand. Check comparable properties and your market history.
Does EGI include the mortgage?
No. EGI is purely an income figure. Mortgage payments are debt service, which is subtracted well below NOI when you calculate cash flow, not when you calculate income.
David Chen · Buy-and-Hold Investor, Denver, CO
David is a long-term rental investor who manages a portfolio of buy-and-hold properties. He writes from the operator seat about expenses, reserves, and the numbers that decide whether a rental actually performs.
Educational Disclaimer
All calculations are estimates for educational and planning purposes only. PropertyFlowTools.com does not provide financial, tax, legal, lending, or investment advice. Verify calculations and consult qualified professionals before making property or financing decisions.