Total return is a way of objectively comparing returns on different assets. The concept is simple – you buy an asset for $X, use all income when received to buy more at the current market price, sell it all for $Y, and your total return is Y/X. Annualized % is (Y/X)^(1/n)-1 where n is the number of years.
For example, you buy a 5 year compounding GIC at 3%, after 5 years it’s worth 1.03^5 = 1.16. Total return is 1.16 or 3% annualized (note not 16%/5).
When you have an asset with varying yield or price it gets more complicated. For stocks people like S&P calculate the total return for us. But for houses you have to do it yourself. What I decided to do is calculate the total return for a benchmark Vancouver house from 1985Q4 to 2010Q4, a 25 year period which saw the biggest price increase ever in Vancouver (or in most other places for that matter). Reinvestment of income is conceptually a bit of a problem as you can’t buy a “slice” of a house but that’s the way I’ll compute it because total return always does it that way.
My assumptions:
– quarterly prices as per UBC/Sauder. start 1985Q4: 160,100; end 2010Q4: 772,600
– starting rent $1500/month
– starting taxes $1800/year
– starting maintenance/insurance $1800/year
– rent, taxes, maint/insurance rise with CPI which increased by 86% over the period
And at the end you have 2.29 “houses” which you sell for a total of $1,769,254. Total return is 11.04 over 25 years which is 10.1% annually.
And what did the TSX 60 return over the same period? 9.5% annually.
