How to Compare Real Estate Investments Using the Right Metrics

Book: Real Estate by the Numbers | Authors: J Scott and Dave Meyer | Chapter: 23

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You’ve now got a full toolkit of return metrics. But knowing the formulas is only half the job. The harder part is knowing when to use each one, and how to use them together to make a real decision.

Chapter 23 is all about that. It walks through two extended examples: first, comparing two passive investments using ROI, AAR, and CAGR; then using IRR to decide between two rental property strategies.

Comparing Two Simple Investments

The book starts with two investments that both begin with $1,000. Investment 1 is held for ten years. Investment 2 is held for seven years. Profits are reinvested throughout.

At the end of each year their values are:

Investment 1 (10 years): $1,000 → $1,200 → $1,250 → $1,400 → $1,300 → $1,150 → $1,600 → $1,800 → $2,000 → $2,100 → $2,400

Investment 2 (7 years): $1,000 → $1,200 → $1,250 → $1,400 → $1,300 → $1,450 → $1,600 → $1,900

Now let’s compare them with a few metrics.

Step 1: ROI

Investment 1: ROI = ($2,400 - $1,000) / $1,000 = 140%

Investment 2: ROI = ($1,900 - $1,000) / $1,000 = 90%

Investment 1 wins. But you knew this couldn’t be the full story, because Investment 1 runs for three extra years. Those three years are doing some of that work.

Step 2: Average Annual Return (AAR)

To calculate AAR, you need the year-by-year ROI for each investment.

Investment 1 annual ROIs: 20%, 4%, 12%, -7%, -12%, 39%, 13%, 11%, 5%, 14%

AAR = (20 + 4 + 12 - 7 - 12 + 39 + 13 + 11 + 5 + 14) / 10 = 9.9%

Investment 2 annual ROIs: 20%, 4%, 12%, -7%, 12%, 10%, 19%

AAR = (20 + 4 + 12 - 7 + 12 + 10 + 19) / 7 = 10%

Essentially tied. Investment 1 has the better total ROI, but when you factor in time, both look about the same per year. Now it’s genuinely hard to call.

This is where compounding becomes the tiebreaker.

Step 3: CAGR

Investment 1:

CAGR = ($2,400 / $1,000)^(1/10) - 1 = 9.15%

Investment 2:

CAGR = ($1,900 / $1,000)^(1/7) - 1 = 9.60%

Investment 2 wins.

Even though Investment 1 has a higher raw ROI and the AARs are basically equal, once you account for the compounding effect of money over time, Investment 2 is the better deal. The shorter hold period means your money is working harder per year.

The book summarizes this well: “Remember that as investors, we want to realize the beneficial impacts of compounding as much as possible, and therefore should rely on CAGR over ROI or AAR in any investment where profits can and are reinvested.”

One Caveat

The comparison only holds if the money coming out of Investment 2 at Year 7 goes somewhere productive for Years 8-10. If $1,900 sits in a 1% savings account for three years while Investment 1 continues to grow, the calculus might flip.

This is why the book recommends running multiple scenarios. What would you actually do with the proceeds from Investment 2 after it ends? Factor that in and rerun the analysis.

Comparing Strategies with IRR: Rehab vs. No Rehab

The second example is more realistic for rental property investors. You’ve found a duplex listed at $480,000. You’re putting 20% down ($96,000). You plan to hold for ten years. The question: should you do a major renovation, or just buy and rent as-is?

Scenario 1: Full Rehab

You spend six months and $120,000 renovating the property. Total initial investment: $216,000. But after the rehab, rents jump from $2,200/month to $3,600/month. The property also appreciates faster (3% per year) and expenses stay low ($7,500/year). At Year 10, projected sale price is about $645,000.

Scenario 2: No Rehab

You spend $10,000 on basic repairs, rent immediately. Total initial investment: $106,000. Rents stay at $2,200/month, appreciate at 1%/year, expenses are higher at $10,000/year, and appreciation is slower. Sale price at Year 10 is about $530,000.

Without running the numbers, most people would guess Scenario 1 is better. More cash flow, higher rents, better appreciation. But your gut doesn’t know about opportunity cost and the time value of that extra $110,000 upfront.

The IRR Results

The annual cash flows were modeled out for both scenarios.

Scenario 1 (Rehab) IRR: 25.85%

Scenario 2 (No Rehab) IRR: 28.69%

Scenario 2 wins. The lower upfront cost and faster entry to cash flow beat the bigger absolute numbers from Scenario 1 when you account for how money compounds over time.

The extra $110,000 you would have spent on the rehab in Scenario 1 had real opportunity cost. And having that money sitting in renovations during a six-month construction period generated zero returns.

What If You Put That Extra $110,000 to Work?

The book goes further with a “Dig Deep” section. What if in Scenario 2, you took that extra $110,000 and put it into a passive syndication that paid 10% cash flow annually ($11,000/year) with a 5X return ($550,000) at Year 10?

Running the combined IRR (duplex + syndication together):

Combined Scenario 2 IRR: 25.69%

Now Scenario 1 (25.85%) barely edges out. The difference is 0.16%. Whether that’s worth doing a full six-month renovation is a question you have to answer for yourself.

This is one of the most honest points in the book: “While we’re huge fans of understanding the math behind all of our decisions, this is the reason why we reiterate that while the math is important, it shouldn’t be the only determining factor in our investment decision-making.”

A 0.16% difference in IRR might not be worth the extra stress, risk, and work of managing a major renovation.

What This Chapter Teaches You

A few practical takeaways:

Use the right metric for the question. For simple investments with reinvested profits, CAGR is your best metric for comparison. For complex deals with irregular cash flows, IRR.

Run multiple scenarios. The book explicitly recommends comparing your investment with different hold periods, different renovation levels, and different strategies. IRR makes this easy once you have a model.

Don’t ignore what you’d do with idle cash. When comparing investments that require different amounts of capital, you need to account for what happens to the difference. Ignoring it gives you a misleading comparison.

Math plus judgment. The numbers narrow down your choices. But at the end of the day, things like deal complexity, risk tolerance, and how much work you want to take on are also valid inputs. IRR doesn’t measure stress. You have to factor that in yourself.

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