Property Investment

# Holding period return formula example and calculator

Holding period return measures the performance of a property investment over a particular holding period. It is a useful formula that helps real estate investors determine whether their investment is working, and if it is, how much is the  expected rate of return.

In this article we don’t only discuss the formula to work out the rate of return, we have also provided a useful calculation tool immediately below to help you work out your numbers. The explanation of the formula that the calculator uses, read the rest of the article below.

There are several instances that an investor may want to estimate this investment performance measure. The most common is the case of a property that has been acquired some time ago and the investor estimates periodically the return achieved by the particular investment as a part of the performance monitoring process. In this case, the generic formula for calculating such a return is the following:

RHP = (Vehp – PP – SC + NOIhp) / PP (1)

where:

RHP = Holding period return
PP = Purchase Price
Vehp = Property Value at the end of the holding period
NOIhp = Net Operating Income received over the holding period
SC = Sales Cost

In such a case, we may want to annualize the estimated return in which case we can use the formula:

ARHP = (1 + RHP)(1/n) – 1 (2)

Where:

ARHP = Annualized holding period return
n = number of years within holding period

## Example

Purchase Price (PP): 200,000

Holding Period (n): 2.5 years

Appraised Value at the end of 2.5 years: 220,000

NOI received over holding period: 35,000

Sales Cost: 5% or 220,000 × 0.05 = 11,000

Therefore, the holding period return can be calculated as:

RHP = (220,000-200,000-11,000+35,000)/200,000

RHP = (220,000-200,000-11,000+35,000)/200,000

RHP = 0.22

Furthermore, we can annualize this performance measure by applying formula (2) as follows:

ARHP = (1 + 0.22)(1/2.5) – 1

ARHP = (1.22)(1/2.5) – 1 = 1.08279 – 1 = 8.3%

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