In one sentence
A property's potential gross income less vacancy and collection loss, the top line before operating expenses.
The longer version
EGI takes potential rent at full occupancy and subtracts realistic vacancy and credit loss, giving the income actually available to cover expenses and debt. It is the starting point for NOI.
Underwriting scrutinizes the vacancy assumption, because an optimistic EGI flows straight through to an inflated NOI and value.
Common questions
- How is effective gross income calculated?
- Start with potential gross income, subtract vacancy and collection loss, and add other income such as parking or fees.
- Why is effective gross income important?
- It is the top line of the operating statement that net operating income is calculated from, after operating expenses.
- What vacancy rate do lenders use for EGI?
- Usually the higher of actual vacancy and a market or minimum underwriting vacancy, so a full building is not underwritten at zero vacancy.
Keep reading
- The due diligence checklist, built to be runChecklists as systems, not documents.
- The data room due diligence checklistWhat to load, in what order.
- How life companies run commercial mortgage operationsThe long servicing tail.
- Commercial loan softwareWhere this sits in the lending stack.
- NOI calculatorFrom EGI to NOI.