1. What is Return on Equity in Real Estate?

Return on Equity (ROE) measures how effectively an investor's equity is being used to generate profits in a real estate investment. It shows the percentage return earned on the equity portion of the investment.

2. How Does the Calculator Work?

The calculator uses the ROE formula:

Where:

• \( NOI \) — Net Operating Income (USD)
• \( Debt\ Service \) — Annual debt payments (USD)
• \( Equity\ Invested \) — Total cash invested (USD)

Explanation: The equation calculates the cash return on the actual equity invested after accounting for debt obligations.

3. Importance of ROE Calculation

Details: ROE helps investors compare the performance of different real estate investments and assess whether the returns justify the equity capital invested.

4. Using the Calculator

Tips: Enter all values in USD. NOI should be annual, debt service should be annual payments, and equity invested is the total cash invested in the property.

5. Frequently Asked Questions (FAQ)

Q1: What's a good ROE in real estate?
A: Generally 8-12% is considered good, but this varies by market and risk profile. Higher-risk investments should command higher ROE.

Q2: How does ROE differ from ROI?
A: ROI considers total investment cost, while ROE focuses specifically on the return generated on the equity portion after debt.

Q3: Why subtract debt service?
A: Debt service represents the portion of cash flow that goes to lenders, so we subtract it to see what's actually earned by the equity investor.

Q4: Can ROE be negative?
A: Yes, if debt service exceeds NOI, resulting in negative cash flow to the equity investor.

Q5: Does this account for appreciation?
A: No, this calculates cash-on-cash return only. Total return would include appreciation and tax benefits.