Returns

What Is the Average Rate of Return (ARR)?

The average rate of return, or ARR, is the average annual return an investment produces over the hold, calculated without regard to when the cash flows arrive.

Average rate of return = Average annual return ÷ Initial investment × 100

ARR is a quick measure of performance: total the returns across the hold, average them per year, and divide by the money you put in. Its simplicity is also its limitation, because it ignores the time value of money.

ARR vs IRR

This is the distinction that matters. IRR accounts for WHEN cash flows occur: a dollar returned early is worth more than the same dollar returned late, because it can be reinvested, so IRR weights earlier returns more heavily. ARR treats every dollar the same regardless of timing. Two deals can post the same ARR yet have very different IRRs if one front-loads its cash flow and the other back-loads it. Use ARR for a fast read; use IRR when timing matters, which over a real hold, it always does.

Related terms

• Internal Rate of Return (IRR)
• Equity Multiple
• Cash-on-Cash Return

Part of the RVP Underwriter glossary of income-property underwriting terms. Browse all definitions, or put them to work with the free calculators.