Effective Gross Income is the starting point for any serious underwriting of a rental property. Gross Potential Rent (GPR) tells you what the property would earn in a perfect world; EGI tells you what it realistically earns in this one. The formula is straightforward: EGI = Gross Potential Rent - Vacancy and Credit Loss + Other Income. Vacancy and credit loss is typically expressed as a percentage of GPR (a 5% vacancy allowance on a $200,000 GPR property equals $10,000 in lost revenue). Other income captures everything outside of base rent: parking fees, pet fees, laundry revenue, late charges, and storage unit rentals. In notation: EGI = GPR x (1 - Vacancy Rate) + Other Income.
EGI matters because it is the revenue figure that feeds directly into Net Operating Income. Lenders, appraisers, and sophisticated buyers all use EGI rather than GPR when sizing loans or valuations, because GPR overstates what the asset actually delivers. Using GPR instead of EGI to project cash flow is one of the most common mistakes first-time investors make, and it leads to overpaying for properties and underestimating how much operating cash you need in reserve. A stabilized multifamily asset in a competitive market might carry a 5-7% vacancy allowance; a newer lease-up in a secondary market might require 10-12%. Picking the right vacancy assumption requires local market data, not guesswork.
Credit loss (sometimes called collection loss) is a separate line item from physical vacancy. A unit can be legally occupied and yet generate zero rent if the tenant stops paying and eviction takes 60 to 120 days in your jurisdiction. Separating physical vacancy from credit loss gives you a cleaner picture of operational risk and helps you diagnose problems: rising physical vacancy suggests a leasing or pricing issue, while rising credit loss points to tenant screening or property management failures. Best-practice underwriting tracks both independently and benchmarks them against your own historical data and comparable properties in the submarket.
Worked example
A 10-unit apartment building has an asking rent of $1,800 per unit per month. Gross Potential Rent is $1,800 x 10 units x 12 months = $216,000 per year. The market vacancy rate for the submarket is 6%, and the owner historically loses another 1% to slow-paying or non-paying tenants. Total vacancy and credit loss: 7% x $216,000 = $15,120. The property also earns $4,800 per year in pet fees and $2,400 per year in coin-operated laundry revenue, for $7,200 in other income. EGI = $216,000 - $15,120 + $7,200 = $208,080. This number, not the $216,000 headline figure, is what a lender or buyer should use to project Net Operating Income and evaluate the property's true earning power.