ROE helps long-term holders understand whether their growing equity is still working hard for them or should be redeployed into new properties.
Example: $8,000 annual cash flow on $200,000 equity = 4% ROE. If you could sell, pay off the loan, and redeploy into a higher-yield property, ROE reminds you that sitting equity is not free.
Declining ROE over time (as equity grows but cash flow stays flat) is the signal many investors use to trigger a 1031 exchange into a larger property.
Related Terms
Cash-on-Cash Return
Annual pre-tax cash flow divided by total cash invested.
Internal Rate of Return (IRR)
The annualized return rate that makes the net present value of all cash flows equal to zero.
Equity Multiple
Total cash returned divided by total cash invested — shows how many times you multiplied your money.