Investing in rental properties is a long and well traveled road. I know within a decade or two I’ll reach the destination of financial freedom and flexibility – whether that means retiring early, paying for kids’ college, or exciting vacations.

Four and a half years since starting, I am ready to examine the results so far.

Last week we saw the numbers for each individual property: Behind the Numbers – How I Calculated the Return on My Rental Properties. The complete calculations can be found in this spreadsheet:

### Treating All My Rentals as a Portfolio

It was cool to see that I have made 155% on my investment in the Atlanta property in less than 5 years. I’m pretty pumped about that, but I have two properties to consider. And a year from now I’ll have 3 or 4.

As I add more, that 155% return on Property 1 contributes less and less by itself. It is just one part of the whole portfolio, so we have to zoom out and look at it all together.

### How to Calculate the Overall Portfolio Return

I initially struggled with how to answer the question – *what is the overall return for my rental portfolio?* It is easy to calculate for each individual property, but the hard part is that each property is purchased at a different time.

Imagine putting $20k down for Property A five years ago. Then $40k down for Property B two years ago. Do you consider $60k as the initial investment and calculate your return from there? That will really warp things because most of the money was not invested those first three years.

Instead we have to treat it as individual cash flows to account for when the investments were made. Here is an example for the hypothetical Property A:

### How Do We Figure Out the Individual Cash Flows?

Just put all the income and expenses in a spreadsheet, then subtract!

Cash flows are usually done monthly or yearly, but I opted for every 6 months. I think this strikes a nice balance to give an accurate picture without too much extra work.

Each cell in the spreadsheet will have the net (income minus expenses) for a given six months. An example is H2 2013, meaning July through December in 2013.

Looking at my Atlanta property, in H2 2011 the net was negative $21,013. This was paying the down payment, closing costs, taxes, insurance, etc. Then in H1 2012 the net was positive $1677 after all expenses. Keep doing this for every half year until the present.

### Adjusting for Time

When doing cash flow analysis, you should build in the adjustment for the time value of money. This sounds complicated, but the concept is simple. Would you rather have a dollar today or a year from now? Obviously now. So let’s adjust our calculations to take this preference into account.

The tricky part is quantifying exactly how strong this preference is. It’s not just inflation (a dollar a year from now is worth less) or opportunity cost (you can invest the dollar today for returns in the future). The good news is that there isn’t just one right answer – so let’s go with a generally accepted number and not worry about it too much.

I decided to use a 2% per half year discount rate. This means I value $1 today as equal to $1.02 six months from now. Which is equal to $1.49 ten years from now (notice the compounding effect, it isn’t just 20x.02). Making these adjustments is called a discounted cash flow.

Add them all up for the net present value of the portfolio – a **profit of $33,000** in today’s dollars.

### What is the Equivalent Yearly Rate of Return?

The easiest way to evaluate an investment is a simple percentage: the yearly rate of return.

Luckily there is a nice Google Spreadsheet function to calculate the internal rate of return for the given cash flows.

After adjusting it from the six month to yearly number, it gives a nice easy to understand percentage. **A 29% yearly return. Boom!**

### This Is More Complicated Than It Needs to Be

Trying out all these Econ 1 calculations was fun, but not necessary. The return of my rental property investments is very good, I already knew that.

Does it matter if it is a 20% return or a 30% return? Well sure, that will change the result drastically over the course of a decade.

Do I need to accurately know the result of my portfolio? Not really. Either way it is significantly better than I would get in the stock market.

Don’t let complex calculations hold you back from something that is very easy to understand. People need a place to live and many want to rent. You can help and make a huge profit without too much effort.

*Note: I believe using MIRR might be better than IRR because there are multiple negative cash flows. But it also brings in more assumptions that result in huge swings in outcome, so seems less accurate for this. Someone correct me if I’m wrong.*

## What say you?