I like to buy fixer-upper rental properties.

It can be a great way to build serious equity up front, as well as take care of most of the “cap ex” expenses before the property is ever rented out. And, of course, nice houses tend to attract nice people.

However, it can be tough to calculate the value of those improvements on a “return on investment” level.

For example, you might buy a fixer-upper property and build $50,000 of equity into the deal — but not get the greatest cash flow because of that.

Does that mean the deal is bad?

Not necessarily. Your total return on investment is based on more than just cash flow — it’s also based on any appreciation you get (whether “forced” or “natural”) and the loan being paid down over time. I’m not suggesting you buy a bad deal just because you think appreciation is going to increase. However, it can be helpful to look at more than just the cash on cash return.

Let me give you a quick example:

Let’s say you bought a house for $100,000. You put 20% down ($20,000), paid $5,000 in closing costs, and spent $50,000 of your cash rehabbing the property. So, you’ve now spent $75,000 of your money on this property. Now, let’s say that the property produces $4,000 per year in “cash flow” for you, after all the expenses have been paid. Therefore, you could say that your “Cash on Cash Return” is 5.3% because $4,000 / $75,000 = .0533.

Is that a good deal?

**Related: **The Top 8 Real Estate Calculations Every Investor Should Memorize

Well, *it depends. *

After all, what if, after the property was fixed up, it’s now worth $300,000? That changes things a bit, doesn’t it? What if it’s worth $500,000? Or $1,000,000? Yes, that’s probably absurd, but it illustrates a point: Cash on cash return isn’t everything, especially when you are dealing with fixer-upper rentals.

Furthermore, let’s say that you rented that same property out to some tenants for 10 years and then sold it. During that time, the value went from our original $300,000 all the way to $400,000 — but the loan that we had for $80,000 was paid down to $65,000. We now have a pretty massive amount of equity in this deal — over $300,000! BUT we still might only be getting that 5.3% cash on cash return if rents did not increase. Someone who ONLY looks at cash-on-cash return might never have purchased that property because it didn’t meet their cash-on-cash return requirement. And they would have missed out on potentially $300,000 in profit.

## Introducing: “The Annualized Total Return”

This is why BiggerPockets just introduced the “Annualized Total Return” option on the Rental Property Calculator. This simple change has made it easier for you to include any appreciation (forced and natural) that you might receive on the property AND the loan principal being paid off over time.

When running a calculation on the Rental Property Calculator, you’ll now see an option on the bottom of the third page that asks for the “Sales Expenses.” This is the percent of the total sales price that would be required to pay if you sold the property. Essentially, this number is the closing costs you would pay when you sold the property, including agent commissions. I typically use 9% or 10%, knowing that in my area, agents typically keep 6% of the sales price, my county keeps 1.5%, and the title company gets another few thousand dollars.

Then, when you land on the results of the calculator, page 4, you are going to see in the year-by-year chart at the bottom two new fields, “Total Profit if Sold,” as well as “Annualized Total Return.”

* Total Profit if Sold:* This is the profit you would make on the property if you sold it. It is computed by taking the After Repair Value in that given year, subtracting out all the sales expenses (the percentage you entered on the bottom of page 3), subtracting out the mortgage balance, subtracting out any money you put into the deal, and adding in all the combined cash flow since you purchased the property.

**Related:**The 2 Biggest Mistakes Made in Calculating Rental Property Returns* Annualized Total Return:* This figure is the return on investment that you made on the money needed to do the deal, averaged over the length that you owned the property. It is computed by taking the Total Profit If Sold and dividing it by the cash you put into the deal. Finally, that number is divided by the number of years you held the property for to get an annualized amount.

That’s it! Now you’ll be able to more easily see the potential in a property — even if the cash flow is not as high as you might want.

Of course, this isn’t to say you should buy a bad deal and just hope that appreciation will bail you out. This is simply a way of combining all the different sources of profit into one beautiful number.

Try it out for yourself today at BiggerPockets.com/analysis.

Check out this video to see the new feature in action:

*Investors: Any questions or comments on this new feature?*

**Let me know, and let’s talk!**

## 11 Comments

This is a great extra tool to look at for better analyzing a deal that could have a huge upside, and help in looking long-term verse looking at the short-term on the return. Of course this is a long game, but this just adds to that confidence for an investor to say yes to the deal, or no!

This can be a dangerous tool to play with as you can teeter and cross over the line from “investor” to “speculator”. In a pure “buy and hold” situation, you’re ignoring future appreciation, because the assumption is that you literally hold it forever. That being said, cash on cash also needs to have its limitations because a simple COC equation doesn’t account for debt service pay down over the course of the time you own the property. Even assuming zero appreciation over the life of ownership, eventually that debt goes to zero and you didn’t put any additional money in.

Ultimately though, where do you stop? If you start running all the future numbers into a calculator to help an investor today determine if a deal is good or not, when and how do you factor in future cap ex and maintenance expenses? Do you just throw a percentage per year based on purchase price, income, etc? Or is there something more sophisticated at play in determining those eventually outlays of cash.

Bottom line, I think it’s a great addition to the tool. I do think though in the quest of spoon feeding the noob investor, we need to not lose sight of the fact that some things can’t be coddled and you’ve got to just get out there and get your hands dirty. When you spend time analyszing properties on a regular basis in your target market you will get to the point where you just “know” and feel it like second nature that a deal is a good one or not.

This is a very great feature to have on the calculator, thanks so much Brandon!

I used this tool for the first time last week and it’s great. I have something similar in excel but mine is a lot more clunky and less professional. The output from this tool can be used in financing packages for lenders as well.

One of my biggest challenges is analyzing the the post-rehab ROE rather than the ROI mentioned above and in the tool (which include the equity lift from the rehab). The $4000 in cash flow looks a lot different on a $300k property than it does on the original $150k investment and that may not meet the same investor’s acquisition criteria for a new rental without the equity play. I am hoping to learn more about this topic from the members.

It’s curious that you chose to add average annual return (“Annualized Total Return”) to the calculator instead of internal rate of return (IRR). Could you please elaborate on the thought process behind this decision? My feedback for future iterations of this tool:

include IRR as another metric calculated by the tool

I’m so excited to see this! Thank you for adding this to the tool. I’ll be checking this out!

This is great. Thank you. However, can you help me understand the math behind the annualized return beyond year one?

I am assuming the “cash you put into the deal” is fixed, correct, as you span from year one to year 30? Only the “profit upon sale” and “years owned” change? But if that is true, then I cannot make the math work as illustrated in your example.

Thanks in advance!

I also need to see the math otherwise I am not really able to understand the utility of the calculation. I also made the same assumptions that you made, but was not able to come close to the values that are reported in the example.

I hope that this is clarified.

@Anthony Pal and @Stephen Sintay – were you every able to get clarification on this. The formula given does not add up after year 1 there is something else being considered. Any updates?

Just figured this out. It’s using an annual return calculation: https://www.investopedia.com/terms/a/annual-return.asp, which in this example is ( (Total Profit if Sold + Total Cash Needed) / Total Cash Needed ) ^ (1/Number of Years) – 1

This is great thank you. A question I have had for a while is how to accurately and reliably compare the returns from buy and hold real estate to other asset classes. For example if we wanted to compare the annualized total return from the example above to the historical S&P 500 annualized total return. The number that I usually find for the S&P 500 is ~10% average annual return (for the last 100 years), however I believe this number includes dividend reinvestment. If you don’t take into account the dividend reinvestment the return is closer to ~6% (Ref: https://dqydj.com/sp-500-return-calculator/). So, if I wanted to compare the projected returns from the example to the historical annual average returns for the S&P 500 would the numbers that I compare be the 6% and the average of the annualized total returns from the calculator (looks like it would be 30 -40%)?