Annualized Total Return on Rental Property Calculator

[Andreas Galliker]

I need some clarification regarding the "Annualized Total Return" number that is calculated in the Rental Property Calculator as follows:

Formula used: ((Ending Value / Beginning Value) -1) / Years; 

However, in my 10 years of experience in finance and investments plus during my formal education (MS in Finance) I have always learned that the annualized return formula looks as follows:

((Ending Value / Beginning Value) ^ (1/Years)) - 1

In earlier years the delta between the two formulas is somewhat negligible; However, in later years (approx. after five years); the delta is getting quite substantial. 

So can somebody please explain why we use the first formula (above) instead of the widely acceptable second formula? Is this something specific to real estate?

Thanks,

Andreas

[Stormer Santana]

The actual formula used: ( (Total Profit if Sold + Total Cash Needed) / Total Cash Needed ) ^ (1/Number of Years) – 1