Effective gross income
Also called EGI.
Effective gross income is all the revenue a property is expected to collect in a year: gross potential rent, less vacancy, loss to lease, concessions and bad debt, plus other income. It is the revenue figure operating expenses are subtracted from to reach net operating income.
How it works
EGI is the first number in the pro forma that corresponds to money arriving in a bank account, which is why it is the correct denominator for the management fee, for the operating expense ratio, and for most of the revenue-side sanity checks a lender runs.
The deductions between GPR and EGI are the ones sellers compress. Vacancy, concessions, bad debt, non-revenue units and loss to lease are five separate economic events with five different causes, and a summary page that reports a single combined percentage is telling you the total without telling you the mix. A property at 6 percent vacancy with 1 percent bad debt is a different asset from one at 3 percent vacancy with 4 percent bad debt, even though the deduction is the same.
Other income is added at this stage rather than in the rent block because it does not scale with rent and should not be grown with it. Utility reimbursements track utility costs, parking tracks demand, and application and pet fees track turnover, which means turnover assumptions and fee income move in opposite directions.
Formula
EGI = gross potential rent - loss to lease - vacancy - concessions - bad debt + other income- Loss to lease is deducted only when GPR is stated at market rent
- Vacancy is the physical loss, concessions are free rent given to sign or renew, bad debt is contracted rent never collected
- Other income covers everything that is not rent for the space itself
Worked example
The 220-unit sample property, year one, GPR stated at in-place rent.
| Gross potential rent | $4,870,800 |
|---|---|
| Vacancy and credit loss7.0% | ($341,000) |
| Other income$75 per unit per month | $198,000 |
| Effective gross income | $4,727,800 |
EGI is 97.1 percent of GPR here because other income partially offsets the vacancy deduction. That ratio is worth watching on its own: a property where other income is doing a lot of the work has revenue that behaves differently from rent.
The common mistake
Charging the management fee against the wrong base
Property management contracts are almost always a percentage of collected revenue, which is EGI. Applying the fee to gross potential rent instead overstates the expense by the whole vacancy and loss-to-lease deduction, and applying it to net operating income understates it badly. On this property a 3 percent fee is $141,834 against EGI and $146,124 against GPR. The dollars are small; the habit of not checking which base a formula points at is not, because the same error against a bigger line item is what breaks a model.
Related terms
- Gross potential rentGross potential rent is the rent a property would collect if every unit were occupied for all twelve months at full rent, with no vacancy, no concessions and no delinquency. It is the top line of the pro forma, and everything below it is a deduction.
- Net operating incomeNet operating income is a property's effective gross income less all operating expenses, before debt service, income taxes, depreciation and capital expenditure. It is the figure a cap rate is applied to, the numerator of debt yield and DSCR, and the number a purchase price is ultimately negotiated against.
- Other incomeOther income is every dollar a property collects that is not rent for the space itself: utility reimbursements, parking, storage, pet rent, application and administrative fees, late fees, laundry, and amenity or trash charges. It is added to rent revenue on the way to effective gross income.
- Operating expense ratioThe operating expense ratio is total operating expenses divided by effective gross income. It is a fast sanity check on whether an expense budget is plausible for the asset type, the market and the way the property is run.
- Economic versus physical occupancyPhysical occupancy is the share of units that are occupied. Economic occupancy is the share of potential rent that is actually collected. The gap between them is everything that stops an occupied unit from paying full rent: loss to lease, concessions, bad debt, employee units and down units.
Every figure, traced to its source
Altyst computes these in exact decimal arithmetic, not with a language model, and clicking any number shows the formula behind it.