What is the marginal rate of return? How is it calculated?
The marginal rate of return is the return gained by holding the property for one additional year. The marginal rate of return considers what the investor could get in the future by keeping the property versus what he could get today by selling the property. The marginal rate of return is calculated on the benefit of receiving the ATCF from operations for one additional year and the ATCF from the sale of the property at the end of the additional year. The actual formula is on page 427 of the text. • What causes the marginal rate of return to change over time? How can the marginal rate of return be used to decide when to sell a property? Increasing rents and increases in the value of the property tend to increase the MRR. Equity buildup from the price appreciation and loan repayment, however, tends to lower the MRR. Also, because the depreciation deduction is fixed but rents are rising, the relative amount of tax benefits from depreciation decreases each year. The property should be sold
