Return on equity (ROE) is a financial measure used to evaluate the profitability of an investment in real estate. It represents the percentage return that an investor can expect to earn on the money they have invested in a property.
To calculate ROE in real estate, you need to take the net income generated by the property and divide it by the amount of equity invested in the property. Net income is the amount of money left over after all expenses, including mortgage payments, property taxes, and maintenance costs, have been paid.
For example, let’s say you purchased a rental property for $200,000, and you put down $50,000 as a down payment. You borrowed the remaining $150,000 from a bank. The property generates $20,000 in net income each year after all expenses have been paid.
To calculate the ROE for this property, you would divide the net income by the amount of equity invested:
ROE = Net Income / Equity Invested
ROE = $20,000 / $50,000
ROE = 0.4 or 40%
This means that you are earning a 40% return on the $50,000 you invested in the property. The higher the ROE, the more profitable the investment is. However, it’s important to keep in mind that ROE is just one factor to consider when evaluating a real estate investment. Other factors, such as appreciation potential, cash flow, and overall market conditions, should also be taken into account.