Total Annual Return Calculation

6 Replies

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. 

Thanks in advance for the help!

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)

Hope this helps!

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)

Hope this helps!

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?

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.

@Ben Unger @Chris Cook

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.

https://www.calculatorsoup.com...
With real numbers from the BP Calculator Cut N Pasted

$100,000PURCHASE PRICE

Purchase Closing Costs$5,000.00
Estimated Repairs$30,000.00
Total Project Cost$135,000.00
After Repair Value$160,000.00

Acquisition

Down Payment$100,000.00
Loan Amount$0.00
Loan Points/Fees$0.00
Amortized Over0 years
Loan Interest Rate0.000%
Monthly P&I$0.00
Total Cash Needed At Purchase$135,000.00

Refinance

Loan Amount$120,000.00
Loan Fees$1,200.00
Amortized Over30 years
Loan Interest Rate3.750%
Monthly P&I$555.74
Total Cash Invested$16,200.00
Year 1Year 2Year 3Year 5Year 10Year 20Year 30
Total Annual Income$14,300.00$15,912.00$16,230.24$16,885.94$18,643.44$22,726.25$27,703.18
Total Annual Expenses
Operating Expenses
Mortgage Payment
$8,885.43
$5,551.00
$3,334.43
$12,715.42
$6,046.56
$6,668.86
$12,836.36
$6,167.49
$6,668.86
$13,085.52
$6,416.66
$6,668.86
$13,753.37
$7,084.51
$6,668.86
$15,304.84
$8,635.98
$6,668.86
$17,196.07
$10,527.21
$6,668.86
Total Annual Cashflow$5,414.57$3,196.58$3,393.88$3,800.42$4,890.07$7,421.41$10,507.11
Cash on Cash ROI33.42%19.73%20.95%23.46%30.19%45.81%64.86%
Property Value$163,200.00$166,464.00$169,793.28$176,652.93$195,039.11$237,751.58$289,817.85
Equity$44,292.94$49,805.17$55,468.45$67,266.64$99,745.16$179,943.54$286,519.59
Loan Balance$118,907.06$116,658.83$114,324.83$109,386.29$95,293.94$57,808.04$3,298.26
Total Profit if Sold *$20,777.91$29,232.12$38,029.60$56,688.30$109,960.60$249,237.22$442,433.76
Annualized Total Return128.26%67.46%49.59%35.09%22.78%15.01%11.79%

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