CAGR (Compound Annual Growth Rate)
CAGR represents the annualized rate of return of an investment over a specified time period, assuming the investment grows at a constant rate each year. It is used to smooth out returns when evaluating the growth of a property’s value, income, or other financial metrics over multiple years, especially when returns fluctuate from year to year.
CAGR formula
Where:
- Ending Value is the value of the investment at the end of the period.
- Beginning Value is the value of the investment at the start of the period.
- n is the number of years.
CAGR is often used to:
- Evaluate Property Value Growth: Assess the annual growth in property value over time.
- Income Growth: Determine the growth rate of rental income over a holding period.
- Investment Performance: Compare different investment opportunities by analyzing their annualized growth.
CAGR helps in comparing projects or investments over different time periods, making it a useful metric for real estate investors and analysts.