Which formula correctly defines effective gross income (EGI) in real estate cash flow modeling?

• A. EGI = PGI minus vacancies and credit losses plus other income
• B. EGI = PGI plus vacancies
• C. EGI = NOI minus operating expenses
• D. EGI = PGI minus concessions and free rent only

Answer: (A)

EGI represents the revenue actually available from rents and other sources before operating expenses. Start with Potential Gross Income (the total rent if every unit is leased at market rent). Then subtract vacancies and credit losses to account for units that aren’t producing rent or tenants who don’t pay. Finally, add other income from non-rent sources like parking, laundry, and vending. Put together, EGI = PGI − vacancies − credit losses + other income. This captures the true cash flow potential from operations before expenses.

Other formulations either omit the other income, mis-handle the losses, or treat EGI as already after operating costs, which is not how EGI is defined.