Return on Equity (ROE) helps property owners assess whether their rentals are generating optimal returns on invested capital.
The Formula
ROE = (Net Annual Cash Flow ÷ Equity) × 100. For example, a property with $25,000 in annual net income and $450,000 in equity yields approximately 5.5% ROE.
Why It Matters
ROE differs from cash-on-cash return because it accounts for appreciation and debt reduction, giving a fuller picture than cash flow alone. Comparing that return against alternatives — savings accounts, bonds, stocks — can reveal whether your equity is working as hard as it should.
Tax Considerations
1031 exchanges and Section 121 primary home exclusions are worth exploring with a tax professional as part of a strategy to convert equity into additional acquisitions.
Consult with financial and tax professionals before implementing any investment strategy — market conditions vary locally.