Accounting Rate of Return article
How is the Accounting Rate of Return calculated for commercial real estate investments and developments? What are the factors that the Accounting Rate of Return takes into consideration when shown in a proforma income statement, and what is ignored? Why is the Accounting Rate of Return useful for investment real estate? These are the questions that are explored using the Proforma Example in this article.
Start a 14 Day Free Trial
|
|
Video Title: Learn about the Accounting Rate of Return
Video Publication_Date: Sunday, May 4, 2025
Video Duration: 2:44
Video Description:
The topic for this commercial real estate investment analysis video is Accounting Rate of Return. Throughout the video planEASe Software is used to illustrate Accounting Rate of Return. The video does not use the current Proforma Example, but all the factors that the Accounting Rate of Return are sensitive to are covered.
|
How is the Accounting Rate of Return calculated?Before Tax
Net Operating Cash Flow + Equity Buildup + Appreciation / Initial Equity = Accounting Rate of Return Before Tax as %
so $400,000 / $1,000,000 = 40%
Afet Tax
Net Operating Cash Flow After Tax + Equity Buildup + Appreciation / Initial Equity = Accounting Rate of Return After Tax as %
so $300,000 / $1,000,000 = 30%
Let's use the current Proforma Income Statement Example to look at how the Accounting Rate of Return can be used.
Downpayment = $1,023,344 | 2010 | 2011 | 2012 | 2013 | 2014 | 2015 |
| Total Gross Income | $365,472 | $372,443 | $370,410 | $376,040 | $384,217 | $414,321 |
| Less: Vacancy & Credit Loss | 19,084 | 3,202 | 14,620 | 5,049 | 3,501 | 50,321 |
| Effective Income | $346,387 | $369,241 | $355,790 | $370,992 | $380,717 | $364,000 |
| Total Operating Expenses | $69,400 | $71,244 | $73,141 | $75,094 | $77,103 | $79,170 |
| Net Operating Income | $276,987 | $297,997 | $282,649 | $295,898 | $303,614 | $284,830 |
| Total Debt Service | $230,823 | $230,823 | $230,823 | $230,823 | $230,823 | $230,823 |
| Net Operating Cash Flow | $46,164 | $67,174 | $51,826 | $65,075 | $72,791 | $54,007 |
| Sale Value | $3,329,006 | $3,591,128 | $3,800,275 | $3,698,723 | $3,795,175 | $3,560,371 |
| Less: Loan Repayment | 2,164,359 | 2,113,745 | 2,141,394 | 2,079,651 | 2,012,784 | 1,940,367 |
| Accounting RoR Before Tax | | 24.30% | 1.17% | 22.32% | | |
In this case the 2012 Accounting Rate of Return was calculated by: | 2012's increase in Sale Value | $3,698,723 - $3,800,275 |
| + 2012's Equity Buildup (Loan Repayment) | 2,141,394 - 2,079,651 |
| + 2012 Net Operating Cash Flow | $51,826 |
| divided by Initial Equity | $1,023,344 |
| equals the 2012 Accounting Rate of Return | 1.17% |
How is the Lender Yield calculated?
The Rate of Return (IRR or MIRR, depending on the Model being used) on the Total Debt Service for the property or investment. It is computed by reversing the sign of the Debt Service (to look at it from the Lender's perspective, where the draw is an outflow and the debt service and repay are inflows) and computing returns as normal on these reversed cash flows.
Written by
Michael Feakins, CCIM
of planEASe Software