Glossary
Annualized ROI
Annualized ROI converts a deal's ROI into a yearly rate, so projects of different lengths can be compared. The simple version is ROI times 12 divided by the number of months.
A 40% return sounds better than 30%. Not if the 40% took a year and the 30% took six months. You could have done the short flip twice.
How to calculate it
- Simple: ROI x 12 / months.
- Compound: (1 + ROI) ^ (12 / months) - 1. This assumes you could reinvest the profit at the same rate.
- Flip A: 30% ROI in 6 months, simple
- 30% x 12 / 6 = 60%
- Flip A, compound
- 1.30 ^ 2 - 1 = 69%
- Flip B: 40% ROI in 12 months, simple
- 40% x 12 / 12 = 40%
Faster deal on a yearly paceFlip A
When to use it
Use annualized ROI to compare a quick cosmetic flip to a long gut job, or a flip to a BRRRR. Run The Deal shows the simple version and scores 40% annualized as good and 20% as marginal.
What to watch
- Very short projects produce huge annualized numbers. A 10% ROI in one month annualizes to 120%, but you cannot line up twelve of those.
- It assumes you can redeploy the cash right away. Idle time between deals lowers the real yearly return.
- It only counts time if you count it right. Use the full months from closing to sale, not just rehab.
- For deals with cash going in and out over years, IRR is the better measure.
See where the base number comes from on the ROI page.
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