Effective gross income (EGI) is the income a rental property can realistically collect in a year. Start with the rent you would get if every unit were full and every tenant paid, subtract an allowance for vacancy and unpaid rent, then add other income such as laundry, parking or pet fees.
Effective gross income = gross potential rent minus vacancy and credit loss plus other income
Say a fourplex rents for $1,250 a month per unit. Gross potential rent is 4 × $1,250 × 12 = $60,000 a year. A 5% allowance for vacancy and credit loss takes off $3,000, and coin laundry adds $1,200. EGI is $60,000 minus $3,000 plus $1,200 = $58,200.
EGI is the starting point for net operating income. Subtract operating expenses of $23,200 and NOI is $58,200 minus $23,200 = $35,000 a year, before any loan payment or income tax.
A common mistake is skipping this step and running the numbers on gross potential rent, as many listings do. No property stays full forever, so that overstates income and every figure built on it. Use a vacancy rate that fits your market, not the best year the seller ever had.