Apart from calculating the first year return on equity, a real estate investor might want to know their return on equity as projected for future years or as experienced after the first year.
This could be important, as once the property has appreciated and the mortgage has been paid down somewhat, the amount of equity invested at that point might be better used elsewhere if current return on equity is low.
Difficulty: Easy
Time Required: 10 minutes
Here's How:
- Get as accurate as possible an estimate of the current or projected value of the property. For this example, we'll use $510,000 as property value.
- Determine the mortgage payoff. For our example, let's assume that the mortgage balance is $375,000.
- Then calculate the Cash Flow After Taxes (CFAT). We'll use $17,000.
- Our Return on Equity is the CFAT / (Value - Payoff):
$17,000 / ($510,000 - $375,000) = .126 or 12.6% is our Return on Equity.
Tips:
- In this example, the return on equity seems great compared to prevailing interest rates. However, if the mortgage had been paid down more and the value had risen more, the result might have been half as much or say 6%.
In that case, it's possible that selling the property and investing in another would be wiser due to a better ROE on the new property.
