Gross Potential Rent vs Effective Gross Income: Which to Underwrite From
By Devon Coombs, CPA, MBA · Teaching Professor of Finance, Santa Clara University · Reviewed August 2026
Underwrite value from effective gross income, not gross potential rent. GPR is the theoretical ceiling, every unit leased at market rent for the full year with nothing lost to vacancy or collections, while EGI is what the property actually collects after vacancy, loss to lease, credit loss, and concessions, plus other income. Operating expenses are paid out of EGI, so NOI, value, and loan sizing all flow from it.
| Gross Potential Rent | Effective Gross Income | |
|---|---|---|
| Definition | Maximum rent with full occupancy and full collection | Collected revenue after adjustments, plus other income |
| Deductions reflected | None | Vacancy, loss to lease, credit loss, concessions |
| Other income (parking, fees, laundry) | Excluded | Included |
| Role in the pro forma | Top line of the income waterfall | The line expenses are paid from to reach NOI |
| What moves it | Market rents and unit count | Leasing, collections, and concession decisions |
| Valuation use | Sizing upside and loss to lease | Basis for NOI, cap rate value, and loan sizing |
When Gross Potential Rent is the right tool
GPR is the right starting point when sizing a property's revenue ceiling and when quantifying upside in a value-add underwriting. The gap between in-place rents and market rents, the loss to lease, is measured against GPR, and each revenue adjustment is typically expressed as a percentage of it. GPR also standardizes comparison across properties, since it strips out how well the current owner happens to be operating.
When Effective Gross Income is the right tool
EGI is the number for valuation, loan sizing, and any projection that ends in NOI. Appraisers and lenders generally apply a stabilized vacancy and collection loss assumption even when a property sits at full physical occupancy, because economic occupancy is what services debt. When underwriting, build EGI line by line rather than applying a single haircut, since vacancy, loss to lease, credit loss, and concessions respond to different market forces and recover on different schedules.
The common mistake
The recurring error is valuing income the asset never collects. A pro forma that capitalizes GPR, or that waves away concessions and credit loss, overstates NOI by the full economic loss, and at a 5 percent cap rate every dollar of phantom income adds twenty dollars of phantom value. Sellers tend to market properties on gross potential numbers precisely because the spread between GPR and EGI is where mispricing hides. Confusing physical occupancy with economic occupancy is the same mistake in a different form, since a full building offering a month of free rent is not collecting full rent.
Work the numbers yourself
Both concepts are taught in depth, with practice questions, in the free Real Estate Finance course.