HOLDING PERIOD RETURN
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 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 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% Tweet
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