A measure of the profitability of a real estate investment or a type of return metric. The average rate of return is calculated as the total net profit of an investment (total cash inflows minus total cash outflows), divided by the length of the investment, divided by the invested capital. The main drawback of this return metric is that it does not take into account the time value of money.
Average Rate of Return = Total Net Profit ÷ Investment Period ÷ Equity Contributed
Example: An investor purchases a retail center for 1,000 all cash. The investor holds the center for 10 years during which time the investment earns 100 each year. At the end of the 10 year period, the investor sells the property for 1,500. The average rate of return of this investment is:
15% = 1,500 ÷ 10 years ÷ 1,000
Click here to get this CRE Glossary in an eBook (PDF) format.