CRE 101 · deweyluong.realtor

Effective Gross Income (EGI) Explained: From Gross Potential Rent to the Revenue a Georgia Property Actually Collects

Every valuation in commercial real estate stands on one line: effective gross income. It is the rent roll with the optimism taken out — scheduled rent, minus the space that will sit empty and the rent that will never be collected, plus the small income streams that actually recur. Get this line wrong and the NOI, the cap-rate value, and the loan all inherit the error. By Túy “Dewey” Luong, CCIM — Founding Broker, SERHANT. Atlanta · 318 closed sales / $281.2M career volume · 678-707-2498

This page builds EGI line by line, runs a full worked example from scheduled rent to value, prices the cost of the most common seller trick (zero vacancy), and lists the four traps to check in any pro forma. The worked example uses made-up, rounded numbers to teach the mechanics. This page is general education, not financial or investment advice.

EGI in one formula

• The formula: EGI = gross potential rent − vacancy loss − credit (collection) loss + other income. Gross potential rent is every space rented at market rent for the full year — a ceiling, not a forecast.
• Vacancy loss is real even at 100% leased: tenants leave, spaces sit between leases, and renewals fail. Stabilized underwriting carries an allowance anyway; lenders and appraisers apply one whether the seller did or not.
• Credit loss is the rent that was billed but never lands: late pay that becomes write-offs, skips, and bad debt. The property's own ledger, not the broker's summary, is the source.
• Other income must be recurring: parking, laundry, storage, CAM-related fees where applicable — counted once, net of the cost of producing it, and only while the tenants who pay it are still there.
• EGI is the top of everything else: EGI minus operating expenses = NOI; NOI feeds the rent roll & T-12 check, DSCR, debt yield, and break-even occupancy.

Worked example. The numbers below are made up and rounded to teach the mechanics. This is not a real property.

• Gross potential rent: $300,000 a year if every space is leased at market rent, all year.
• Vacancy loss at 5%: −$15,000. Credit loss at 1%: −$3,000. Other income: +$12,000.
• EGI: $300,000 − $15,000 − $3,000 + $12,000 = $294,000.
• To value: $294,000 − $99,000 operating expenses = $195,000 NOI; $195,000 ÷ 6.5% cap = $3,000,000. (Price ÷ EGI is a 10.20x effective gross income multiplier, for readers who screen with EGIM.)

The zero-vacancy trick, priced

• The seller's version: same property, vacancy and credit loss set to zero: EGI becomes $312,000, NOI becomes $213,000, and the same 6.5% cap produces about $3,276,923 — roughly $276,923 of value created by an assumption, not by the property.
• The sensitivity to memorize: on $300,000 of scheduled rent, each point of vacancy is $3,000 of NOI — about $46,154 of value at a 6.5% cap. A 5-point argument about vacancy is a ~$231,000 argument about price.
• Concessions are vacancy in disguise: two months free on a new lease is income that will never be collected this year. If it is not in the vacancy line, it must be in the effective-rent line — one place or the other, never nowhere.
• The discipline: rebuild EGI from the trailing-12-month ledger before looking at the ask. Compare the seller's vacancy, credit loss, and other income against the property's own history and the submarket, line by line.

Four EGI traps

• Zero-vacancy pro formas: covered above — the single most expensive assumption in small commercial deals.
• Other income counted twice or forever: fees already embedded in rent, one-time charges treated as annual, or income from a tenant who is leaving.
• Credit loss set to zero against the ledger: if the T-12 shows write-offs, the underwriting must show them too.
• Market rent used for occupied space, contract rent for vacant space — whichever is higher: gross potential rent is one consistent standard (market rent throughout); mixing standards inflates the ceiling before the deductions even start.

Cho nhà đầu tư người Việt

EGI (thu nhập gộp hiệu quả) là doanh thu tòa nhà thực sự thu được trong một năm: tiền thuê tiềm năng tối đa, trừ phần trống (vacancy loss) và phần thu không được (credit loss), cộng thu nhập khác như bãi đậu xe, giặt ủi, kho chứa. Trong ví dụ trên trang này: thuê theo lịch $300.000, trống 5% (−$15.000), không thu được 1% (−$3.000), thu khác +$12.000 — EGI = $294.000. Trừ chi phí vận hành $99.000, NOI còn $195.000, định giá ở cap 6,5% là $3.000.000.

Chiêu phổ biến nhất của người bán là để phần trống bằng 0: cùng tòa nhà đó, NOI nhảy lên $213.000 và giá trị lên khoảng $3.276.923 — tức thổi phồng khoảng $276.923 chỉ bằng một giả định. Mỗi 1% trống thêm trên $300.000 tiền thuê là $3.000 NOI, tương đương khoảng $46.154 giá trị. Và miễn thuê mấy tháng đầu (free rent) cũng là “trống” dưới tên khác. Cách phòng thủ duy nhất: dựng lại EGI từ sổ sách 12 tháng gần nhất trước khi nhìn giá bán. Đây là thông tin giáo dục chung, không phải tư vấn tài chính.

Frequently asked questions

What is effective gross income (EGI)?

Effective gross income is the revenue a property is realistically expected to collect in a year: gross potential rent (every unit or space rented at market rent, all year) minus vacancy loss and credit (collection) loss, plus other income such as parking, laundry, storage, pet and service fees. EGI is the line between the rent roll's promise and the bank account's reality. Operating expenses are then subtracted from EGI to reach net operating income (NOI), and NOI divided by the cap rate gives value — so an error in EGI flows straight into the price.

How do you calculate EGI? Walk through an example.

EGI = gross potential rent − vacancy loss − credit loss + other income. Example with made-up numbers: scheduled rent of $300,000, vacancy at 5% (−$15,000), credit loss at 1% (−$3,000), and other income of $12,000 gives EGI of $294,000. Subtract $99,000 of operating expenses and NOI is $195,000; at a 6.5% cap rate the value is $3,000,000. Change only the vacancy assumption and everything below it moves: each additional point of vacancy on $300,000 of rent is $3,000 of NOI, worth about $46,154 of value at that same cap rate.

What vacancy rate should I use in EGI?

Use the higher of the property's own trailing history and the submarket's stabilized vacancy for that property type — never the seller's best year, and never zero. A fully leased building still turns tenants over, and space sits empty between leases. Lenders and appraisers in Georgia underwrite a vacancy and collection allowance (commonly in the 5% range for stabilized product, higher for weaker retail or office) even when the building is 100% leased on the day of the tour. If the in-place rent roll shows 3% historical vacancy but the submarket runs 7%, underwrite closer to the submarket — you are buying the next ten years, not last year.

What are the most common EGI mistakes in a seller's pro forma?

Four recur. First, zero or near-zero vacancy, which on the worked example inflates NOI to $213,000 and value to about $3,276,923 — roughly $276,923 too high. Second, other income counted gross and forever: one-time fees, a departing tenant's parking, or income already inside the rent figure, counted twice. Third, credit loss set to zero in buildings whose own ledgers show chronic late pay and write-offs. Fourth, concessions and free rent ignored — a tenant paying $0 for two months is vacancy by another name. The fix is mechanical: rebuild EGI from the trailing-12 ledger, line by line, before you ever look at the asking price.

Effective gross income (EGI) là gì, nhà đầu tư người Việt cần lưu ý gì?

EGI (thu nhập gộp hiệu quả) = tiền thuê tiềm năng tối đa (gross potential rent) trừ phần trống (vacancy loss) và phần thu không được (credit loss), cộng thu nhập khác như bãi đậu xe, giặt ủi, kho chứa. Ví dụ trên trang này: thuê theo lịch $300.000, trống 5% (−$15.000), không thu được 1% (−$3.000), thu khác +$12.000, nên EGI = $294.000; trừ chi phí vận hành $99.000 còn NOI $195.000, định giá ở cap 6,5% là $3.000.000. Ba lưu ý: (1) bảng tính của người bán thường để phần trống bằng 0 — cùng ví dụ đó sẽ thổi giá lên khoảng $3.276.923, tức cao hơn khoảng $276.923; (2) mỗi 1% trống thêm trên $300.000 tiền thuê là $3.000 NOI, tương đương khoảng $46.154 giá trị ở cap 6,5%; (3) ngân hàng và thẩm định viên vẫn trừ phần trống dù tòa nhà đang thuê kín 100% — hãy dựng lại EGI từ sổ sách 12 tháng gần nhất, từng dòng một. Đây là thông tin giáo dục chung, không phải tư vấn tài chính.

This page is general education, not investment, legal, tax, lending or financial advice. Every figure in the worked example is made up and rounded to teach the mechanics. Túy “Dewey” Luong, CCIM — Founding Broker, SERHANT. Atlanta · 678-707-2498 · dewey.luong@serhant.com