Real Estate ?, I am not a student

[cecilelrod]

If an investor ties up $300,000 for 3 months and nets from the project $23,750 at the end of the 3 months, what is his rate of return?

 

[Deleted member 4993]

If an investor ties up $300,000 for 3 months and nets from the project $23,750 at the end of the 3 months, what is his rate of return?

According to you, what is the definition of rate of return?

 

[cecilelrod]

If he tied up $300K for one year and made $30,000, I thought his rate of return is 10%
He is tying up $300K for 3 months and making $23,750 which is ?% return on his money

 

[cecilelrod]

According to you, what is the definition of rate of return?

If he tied up $300,000 for one year and made $30,000, I thought his rate of return is 10%
He is tying up $300K for 3 months and making $23,750 which is ?% return on his money

 

[JeffM]

A financial guy might say that that represents an annual return of about 35.6% p. a. but that makes the assumption that you can repeat that kind of transaction four times in a year.

It makes more practical sense to say that you made a gain of about 7.9% because you have no assurance of replicating that gain over the course of a year.

This really is not a math question. If you make a return of 35.6% on a 300,000 investment, that is a gain of $106,800. But actually you end up with $23,750 from this investment.

There is a reason for annualizing returns, namely for having a consistent standard for comparing investments with different lives. But, in my opinion, calculating an annualized return on a single investment that did not have an annual term does not tell you anything of value.

 

[cecilelrod]

Thank you for your thoughts...I think the value is the substantial gain on a short-term investment. I had figured the same percentages but was not sure if I was correct. Real Estate investors like quick turn investments such as this and I wanted to be sure I had figured it correctly. Thanks again

 

[blamocur]

A financial guy might say that that represents an annual return of about 35.6% p. a. but that makes the assumption that you can repeat that kind of transaction four times in a year.

It makes more practical sense to say that you made a gain of about 7.9% because you have no assurance of replicating that gain over the course of a year.

This really is not a math question. If you make a return of 35.6% on a 300,000 investment, that is a gain of $106,800. But actually you end up with $23,750 from this investment.

There is a reason for annualizing returns, namely for having a consistent standard for comparing investments with different lives. But, in my opinion, calculating an annualized return on a single investment that did not have an annual term does not tell you anything of value.

"... calculating an annualized return on a single investment that did not have an annual term does not tell you anything of value." -- I see it as some kind of normalization where you use it to compare to other types of investment, like a CD, which specify the annual rate of return.

 

[JeffM]

"... calculating an annualized return on a single investment that did not have an annual term does not tell you anything of value." -- I see it as some kind of normalization where you use it to compare to other types of investment, like a CD, which specify the annual rate of return.

I do not think that we disagree, or if we disagree, we disagree about nuances that people can reasonably disagree about.

I am wary of the typical annualization process when comparing investments of the same risk class but different terms because that typical process assumes future rates for reinvestment are known with certainty. You cannot sit on an ALCO committee for over twenty years without learning that assumptions about future rates are highly uncertain.

I am even more wary of the typical annualization process when comparing investments of different risk classes and different terms. That typical process generally ignores risk.

 

[blamocur]

I do not think that we disagree, or if we disagree, we disagree about nuances that people can reasonably disagree about.

I am wary of the typical annualization process when comparing investments of the same risk class but different terms because that typical process assumes future rates for reinvestment are known with certainty. You cannot sit on an ALCO committee for over twenty years without learning that assumptions about future rates are highly uncertain.

I am even more wary of the typical annualization process when comparing investments of different risk classes and different terms. That typical process generally ignores risk.

I agree about our disagreement