Suamico, WI · Member since 2016 · 9 posts · 4 votes
Can someone help me understand how the annual total return is calculated on the BP Rental Property Calculator? It seems like something was changed in the calculator in the past couple of months because I used to be able to come up with the same number as the calculator when doing it by hand, but now the numbers don't match up. Here how I am calculating it: (Total Profit if Sold/Total Invested Capital)/Time (in years) When I do this by hand, it matches for the first year, but after that it doesn't.
Real Estate Agent · Houston, TX · Member since 2015 · 46 posts · 25 votes
9y
Eric, I spent some time trying to figure it out and finally got it. This might be the long way of calculating the annualized total return, but my source is from Investopedia.com.
Annualized total return for (Year 2) = (1+A)^(1/Y)-1
Where: A= (Total profit if sold/total invested capital)/(Previous year 1 - 0***)
Y= 2 for the current year
*** this value increases by increments of 1 (so for year 3 annualized total return you would use 1)
Eric, I spent some time trying to figure it out and finally got it. This might be the long way of calculating the annualized total return, but my source is from Investopedia.com.
Annualized total return for (Year 2) = (1+A)^(1/Y)-1
Where: A= (Total profit if sold/total invested capital)/(Previous year 1 - 0***)
Y= 2 for the current year
*** this value increases by increments of 1 (so for year 3 annualized total return you would use 1)
Real Estate Agent · Houston, TX · Member since 2015 · 46 posts · 25 votes
9y
Eric, I spent some time trying to figure it out and finally got it. This might be the long way of calculating the annualized total return, but my source is from Investopedia.com.
Annualized total return for (Year 2) = (1+A)^(1/Y)-1
Where: A= (Total profit if sold/total invested capital)/(Previous year 1 - 0***)
Y= 2 for the current year
*** this value increases by increments of 1 (so for year 3 annualized total return you would use 1)
Fuquay Varina, NC · Member since 2017 · 15 posts · 4 votes
9y
I was just messing with this also and I'm still not grasping this... what is the (previous year 1-0)? Is that the annualized return of the prior year? The total invested capital is fixed. I can't seem to make the numbers work. Maybe a picture might help?
Fuquay Varina, NC · Member since 2017 · 15 posts · 4 votes
9y
OK, figured it out. (previous year 1-0) is literally always 1. The Y increases every year, invested capital is fixed, and total profit is calculated above it.
I wish there were formulas that show exactly how the numbers are arrived at on the BP Analysis reports, similar to how you can hover over the ?'s when entering the numbers into the calculator to gain insight.
I finally figured this calculation out for how the Annualized Total Return Is Calculated. I am looking to hopefully save folks some headaches:
My numbers:
For year 1 the Total Annualized Return is based on:
(ARV+ total profit)/ARV ^ (1/Number of Years)-1
(160,000 + 20,777.91)/160,000 = 1.129 or roughly 129% Total Annualized Return (not sure why it is slightly off with the BP number on the table at the bottom.)
Year 2 and beyond this is the formula
(Total Cash Invested at Refinance Stage + Total Profit If Sold)/Total Cash Invested At Refi ^ (1/Number of Years) -1
($16,200.00 + $29,232.12/16,200) = 2.80445185
2.80445185^(1/2) or 2.80445185^.5 = 1.6746 1.6747-1= 67.47 or 67.47% Total annualized return year 2
Year 3 Total Profit is sold $38,029.60
(16,200 + $38,029.60/16,200)=3.3475 3.3475^(1/3 or .333) = 1.495 1.495-1= 49.5% Total Annualized Return Year 3
If you need help calculating exponents like 3.3475 (to the power of or ^) .3333 check out the calculator below.