You flipped a house in six months and made 15%. Your neighbour held a BTL for five years and made 45%. Who performed better?
At first glance, 45% beats 15%. But that is the wrong comparison because the time periods are different. The flip made 15% in six months. The BTL made 45% in five years. When you annualise both numbers, the flip delivered roughly 32% a year. The BTL delivered roughly 7.7% a year. Suddenly the flip looks like the better investment.
Annualised return converts any return over any period into an equivalent annual percentage. It levels the playing field.
Here is why this matters for property investors. BTL investors typically underestimate their annualised returns because they focus on yield rather than total return. A property that delivers 4% net yield and 3% capital growth is delivering roughly 7% annualised. Over 20 years, that turns a £200,000 investment into £774,000.
Flippers and developers often overestimate their performance because they look at profit percentages without annualising. A 20% profit on a nine-month project annualises to roughly 27%. That is excellent. A 20% profit on a two-year project annualises to 9.5%, which is mediocre.
Annualise everything. It stops you from being impressed by a big number that took a long time to achieve.
The formula
Annualised Return (%) = ((1 + Total Return)^(1 / Years Held) - 1) × 100
Why this matters
Annualised return is the only honest way to compare investments of different durations. Use it before you decide which strategy is working best for you.
If you want to know exactly what a property is worth before you make an offer, Xelox Properties can help. We run the numbers so you do not have to.