What Is ROE In Real Estate And How To Calculate It

Описание: So on my last video I spoke about ROI, and now today we are going to talk about ROE. And this a metric we tend to use when we are buying with OPM, we basically want to figure how much money we are making on our money.

And it’s a very important metric, and by the end of this video, you’ll know what it means, how to use it and why its important.

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First Lets talk about Definition

ROE stands for return on Equity

And it Equity is the amout of ownership you have within a deal

So if something cost 100k and you put down 50k you have 50k worth of ownership, or 50k in equity or 50% of equity



For example:

If you are going to be buying a property you want to see the return you are going to be making on your actual invested money, you’re ownership over the asset

Formula:

(Net Return/equity)*100 = ROE



So lets run this formula and see how it works



First Lets Decide how much equity you will be buying

So I want to buy a piece of real estate

Asset cost about 100k and I’m going to put down 20%

So I have 20k in equity



Second lets calculate the Net Return on the assets

It’s single family home and I can rent it for about $1000 a month

30 year mortgage at 7.48% on the 80k balance is about $558 , taxes $66, insurance $66, $200 for maintenance

Gross inccome is $1000- expenses of $890, I have a net income of about $110



So lets calculate

Per month I keep $110 in my pocket, per year that’s about $1,320

My equity is about 20k

So $1,320/20k *100 = 6.6% rounded up



I could increase by saying: I’ll have fund for maintenance

So my income would increase by $200 per month

My overall ROE would be 18.6%



Why is it important that I run these numbers

Well I want to use that metric, to compare to other investments

If I put 20k into the stock market I can make about 10% annually without any of the management issues

If I bought the property down the street selling for 70k that needs 10k in rehab, I could have put down the same 20k but have an additional 20k in free equity



Why is this important:

It helps you how good of an investment you are making, anything above 12-15% is pretty good

Because remember you have to taxes on the income and worry about inflation



Ps. Obviously the more equity you have in this deal, the lower the return, but also the more ownership you have and the more income you get to keep, and the lower your risk. Remember the lower the risk the lower the return, that’s to be expected.

Now what happens: if you put down 0%

Well in my next video we will talk about the infinite return money hack

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Disclosure & Educational Disclaimer:
Some links in this video may be affiliate links, and I may earn a commission. Content is educational and accurate as of posting; offers may change. I’m an accountant but not your accountant; always consult your own accountant/CPA or financial advisor. No income or results are guaranteed.