Return on Equity (ROE): Real Estate’s Secret Formula for Success

reAL ESTATE

Real estate investors love to brag about their cash flow or cash-on-cash returns, but for my money I think return on equity is the most important real estate metric you should measure for your rental properties.

Especially with the large increases in appreciation the last few years, as a sophisticated investor you need to know how much money you’re making and how much you could be making with the equity trapped in your rental property.

4 WAYS TO MEASURE REAL ESTATE ROI

Cash Flow

If I told you I had a house that cash flowed $1,000 a month I bet you’d be pretty impressed, right? But what if I told you that I had $500,000 tied up in that property to generate $1,000 a month? Much less impressive. You could get that kind of return by putting your money into a savings account.

Cash-on-cash is a pretty straightforward metric. It’s the amount of cashflow you make after expenses divided by how much you have invested in a property.

Cash-on-Cash Return (CoC)

IRR may be the single best way to compare different real estate projects to each other to see which one produces the best return.

Internal Rate of Return (IRR)

Return on equity in real estate blends the simplicity of cash-on-cash returns with some of the benefits of longer term planning of IRR. Return on equity takes into account your overall return on investment given the amount of equity you have in a property.

Return on Equity (ROE)

As you can see, trying to calculate your true returns in real estate and compare them to other investment options can be tricky. But return on equity is the best measure I’ve found to help me make better decisions in my investments. Any sophisticated real estate investor should be using return on equity to help them maximize their returns.

REAL ESTATE  RETURN ON EQUITY

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