Return on Equity (RoE)
Annual return (cash flow plus appreciation plus principal paydown) divided by the total equity you have in a property.
Definition
RoE is the metric that tells you whether your trapped equity is still earning its keep. When you first buy a rental, your cash on cash and RoE are close because most of your money is still in the deal. Over time, as the property appreciates and the loan pays down, your equity grows but your cash flow usually does not grow as fast. That means your RoE silently drops year after year even though the property looks the same on the surface. This is the single most important metric for deciding when to refinance or sell. If your RoE has dropped from 25% at purchase to 6% five years later, your equity is working harder in a different deal. Most investors never calculate this and leave massive capital trapped. Track it on every property, every year.
Formula
Example
A property has $3,600 annual cash flow, $2,400 annual principal paydown, and $8,000 annual appreciation. Current equity is $85,000. RoE = (3,600 + 2,400 + 8,000) / 85,000 = 16.5%.
Frequently asked
What is a good return on equity for rental property?
Above 12% is solid. Below 8% means your equity is probably better deployed elsewhere.
How is RoE different from cash on cash return?
Cash on cash only counts the money you put in at purchase. RoE counts all the equity you currently have in the deal.
When should I refinance based on RoE?
When your RoE drops below your target threshold and a cash out refi would put that equity into a new deal earning a higher return.
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