EP 142: Why You Should Look at Average Annual Return

In this episode of Agents Building Cashflow, Randal dives into the concept of Average Annual Return (AAR) in real estate investing, specifically focusing on apartment syndications. Randal elucidates how AAR is calculated and why it's a crucial metric for investors to consider. He uses simple mathematical examples to demonstrate how returns accumulate over the years and how they are averaged to provide a clearer picture of an investment’s performance. 

This practical approach will help you understand the implications of AAR on your investment decisions, making the episode a valuable resource for anyone looking to optimize their real estate investment strategies. To uncover more insights and learn how AAR can impact your financial goals, tune into the full episode.

Key takeaways to listen to:

• How to calculate average annual returns in real estate.
• Unveiling the significance of average annual return in investment choices.
• Breaking down complex investment metrics with simple examples.

Resources mentioned in this episode:

• RAM Capital Fund - https://www.ridgelineig.com/ram-capital-fund-i

If you’re interested in learning more about investment opportunities and multifamily funds, just contact Randal at podcast@agentsbuildingcashflow.com. 

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To connect with Randal and learn more about passive investing, visit www.ridgelineig.com and follow our social media pages below!

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Transcript

[00:00:00] Intro: If you're a real estate agent earning 200, 000 a year and you want to grow your passive income, this show is for you. Learn secrets other agents use and hear from experts in our field who will guide you on your journey to investing in assets like apartment communities. So you can take your commissions and turn them into cashflow.

[00:00:20] Intro: Here's your host, Randall. Let's dive in. 

[00:00:22] Randal McLeaird: All right. Hey, welcome back this week. We're going to talk about average annual return and why you want to look at this as another. return metric when you're looking at investments. So in apartments specifically and some of the syndications and real estate investing average annual return basically takes your annual return that you're getting.

[00:00:39] Randal McLeaird: And so if you get a 3 percent return in that year based on your investment, so let's say you invest a hundred thousand dollars. And you get 3, 000 back in year one. So that's a 3 percent return. And then in year two, you get, let's just do 5, 000. So it's super simple math 5, 000 in year one. So it's a 5 percent return year two, [00:01:00] you're going to get another five.

[00:01:01] Randal McLeaird: So that's 5 percent year three, 5, 000, another 5%. So far, your average annual return is 5 percent because you're going to average these numbers that you're getting. But when you exit and say you get a big shot in the arm and you get let's say you get a 15 percent return in the last year. So what is your average annual return?

[00:01:21] Randal McLeaird: You take 5, 10, 15, 30. 30 divided by four, and that is going to be your average annual return. So this would've made more sense. If I made it 40% total, it would've averaged 10% average annual return. If you had a 40 sorry, a 25%. 25% on the exit, let's say 25% on the exit, that totals two a 40% total. So then you take that 40% divided by the four years you're in it and you have a 10%.

[00:01:52] Randal McLeaird: AAR. So when you're looking at some of these deals, that tells you that again, that's your average annual return. You would [00:02:00] not have doubled your money in this deal. If you were looking at that as the metric for you to invest in a deal, but it does tell you that your average annual return is, it would have been 10 percent on that deal.

[00:02:11] Randal McLeaird: That's how you calculate that. And that's where that number's coming from. When you see AAR on a deal, that's what you're looking at. Catch you guys on the next episode. Again, if you have any questions or anything, you want to talk about this, please shoot me an email podcast@agentsbuildingcashflow.Com.

[00:02:23] Randal McLeaird: You get me there. And if you haven't gone on rate and review, please go on rate and review wherever you're watching this or listening to it. And we appreciate you. Catch you later. Know that 80 percent of the agents we speak with gotten to real estate in order to gain passive income so they could obtain financial freedom and become work optional.

[00:02:38] Randal McLeaird: If you want to stay up to date, the best way is to make sure you're subscribed. So if you haven't done that, go ahead and do it now. We'll catch you on the next episode.