Averaged Annualized Returns Explained
Averaged annualized returns (ARR) is a financial metric that measures the average rate of return earned by an investment over a year. ARR considers the compounding effect of investment returns and presents an annualized figure to help investors compare the performance of different investments.
This metric is important because it balances out an investment’s return. Nearly without fail, and especially in real estate, an asset will have a higher rate of return a few years into the investment than at the start of the investment. An average annualized return allows investors to average out that return based on the time their capital is held.
AAR is a key metric used to evaluate an investment’s past performance but is also valuable for comparing different investment opportunities. Most syndications will market their estimated ARR. However, understanding how to calculate an average annualized return yourself allows potential investors to verify the sponsor’s underwriting and marketing material.
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