Rondeau et al. suggests this formula for computing payback period as:
(2006, p. 145). For example, an individual decides to purchase a condominium unit in Central London as an investment for £245,000. He further invests around £25,000 to furnish the unit and make it easily leasable. Thus his total investment is £270,000. He then is able to rent it out for £1,900 while spending about £100 in maintenance, thus is able to generate a net profit of £1,800 a month. Using the above formula, it will take a 12 ½ years for the owner to recover the condominium’s purchase price through the net profit of the lease.
Rate of return is a financial measure of the profitability of an investment or a project. It is “what you get, minus what you started out with, expressed as a percentage of what you started with” (Getlner, et al., 2007, p. 176). Using the above example in the payback period concept, let us examine the rate of return of the condominium unit investment as several periods of time. At 12 ½ years, the owner would have made £270,000 of rental profits, equal to the initial investment on the unit. Therefore, the rate of return on the 12.5th year would have been 0%. However if he waited 2 ½ more years to assess his investment, he would realize a 20% rate of return or £54,000.
There are two types of returns, one that is time-based, called periodic returns and one that is dollar-weighted (or in this case, pounds-weighted) called internal rate of return (Getlner, et al., 2007, p. 174). Internal rate of return, commonly referred to as IRR is applicable to real estate investments because it can compute investment performance over long periods of time which is the usual case in owning a property. One need not know the yearly value of the asset, the important information is the value of the capital investment at