Rental Property Investor · San Diego, CA · Member since 2014 · 1k+ posts · 2k+ votes
Hi all,
Has anyone here ran a calculation of your return on equity? To do so, you take the current cash flow and you divide that by equity you have in your RE. So your personal home has little to no ROE. Right? It is a liability.
Plus, if you live in a place like I do, San Diego, you most likely have a lot of equity tied up in your Multifamily and personal residences. I have $5,000,000.00 in RE and about $2,500,000 in Equity. I cash flow approximately $120,000 per year. So, $120,000 divided by $2,500,000 or about 5% return on equity (ROE). Now I expect that cash flow to rise to $160,000 in the next 3-6 months, due to repositioning projects. That will put my ROE at approximately 6.5%. That is more like it.
What is your return on equity? Let us know here!! If you have an extremely low ROE, let me know by personal message and we could communicate and I could give you some suggestions to get yours much higher!!
Real Estate Agent · Jacksonville, FL · Member since 2015 · 1k+ posts · 1k+ votes
9y
ROE is a big metric in securities. In RE I think it is weak. If you own a property free and clear, the ROE is low, in fact it is not calucable. If you owed a lot of money on the property, it would be higher. This assumes you redeploy the equity into another income producing asset. Leverage skews the numbers.
It is simply one data point, that is not enough information. The question is what do you want the data to tell you? Sell, refi etc?
I look at:
rent multipier - allows a comparison of disparate properties, regardless of asset class, finance,location.
Cap rate - using current market and original purchase price
NOI - How much money do I have left at the end of the month
Alternate finance options - refi?
Alternative use of the money. Could I realize a bigger return somewhere else?
Annual Cash Flow + Net Increase in Property’s Equity
Divided by
Accumulated Equity Prior to Year
Includes net sale proceeds after tax as if you were to sell at each years end. One might see a higher or lower REO% but a more accurate accounting picture of ROE.
Hey Matt. Yes, I include cash flow + principal reduction + appreciation in my ROE calculations....total profit. I care more about future estimated ROE rather than the past. If I excluded predictable appreciation, the numbers would tell me to sell a number of assets with higher GRMs (but good future appreciation in prime locations).
@Michael Swan I am also reallocating to cash flow...not to the extent as you, but have been pivoting with my market. Have always purchased value adds regardless of the market. I need the value add cushion so I can screw a few things up and still do okay.
I know I have presented like I am totally getting all my equity out of San Diego, that is not entirely true. My personal residence has about $200,000 equity and my parents have about $600,000 equity in their personal residence. Plus, I still own and have not sold or put on the market yet that 2br 1ba rental condo that has $200,000 in equity. So, I still have approximately 1 million in equity in San Diego RE. The other 1 million to 1.5 million of equity, I have moved to NE Ohio in 7 single family and 6 apartment complexes (85 front doors total there). We have about 5 million to 5.5 million in total RE and about 2.5 million in debt and 2-2.5 million in equity right now.
When overbuilding and too much inventory and vacancy rates begin to show their tell tale signs, I will most likely to move out of NE Ohio to capitalize on the next emerging market, on my way to 1000 front doors, 50 million in RE, 15 million in net worth, and $750,000-$1,000,000 cash flow per year.
Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes
9y
I haven't paid much attention to ROE until today and I just realized something.
Including principal reduction every month, my pretty sucky ROE is getting suckier fast!
I'm similar to you Swanny in portfolio and LTV at about 50%, but I'm at the end of 15 yr mortgages so principal reduction is off the charts on some. On 1 duplex for example, interest is $280, principal $1200. A 10 unit is worse- $214 interest, $1460 principal. On and on. Principal reduction on some is twice my cashflow. Just an observation.
I guess ROE can be seen as inversely related to net worth. Which would you rather have?
Investor · in, MI · Member since 2013 · 226 posts · 102 votes
9y
Return on Equity is about 14%. Properties are not paid off yet (one will be at the end of this year) and once both are paid off, returns will be about 11% Return on Assets at market value.
These are small time properties though, nothing that is scalable at these returns.
Charleston, WV · Member since 2017 · 47 posts · 12 votes
9y
Hi Swanny. Currently my ROE would most likely be negative as my first two properties are not on market therefore not producing yet. Hopefully in six to twelve months i will have a much better answer.
I know I have presented like I am totally getting all my equity out of San Diego, that is not entirely true. My personal residence has about $200,000 equity and my parents have about $600,000 equity in their personal residence. Plus, I still own and have not sold or put on the market yet that 2br 1ba rental condo that has $200,000 in equity. So, I still have approximately 1 million in equity in San Diego RE. The other 1 million to 1.5 million of equity, I have moved to NE Ohio in 7 single family and 6 apartment complexes (85 front doors total there). We have about 5 million to 5.5 million in total RE and about 2.5 million in debt and 2-2.5 million in equity right now.
When overbuilding and too much inventory and vacancy rates begin to show their tell tale signs, I will most likely to move out of NE Ohio to capitalize on the next emerging market, on my way to 1000 front doors, 50 million in RE, 15 million in net worth, and $750,000-$1,000,000 cash flow per year.
I view equity, that is created by market appreciation, in a personal residence a little differently than equity in investment properties. It is much easier to re-allocate investment capital than it is to move to a different market. I think it is wise to understand and be intentional with equity in all properties though and that is even more important in cyclical markets.
I have always focused more on my balance sheet than my P&L and I love the value add apartments that you are doing because it allows you to impact both materially.
Developer · San Diego, CA · Member since 2015 · 1k+ posts · 1k+ votes
9y
@Paul B. Kevin O'Leary (from Shark Tank) has an interesting way he likes to talk about that on-air. If you haven't seen the show, he talks about his capital as soliders and that he expects every soldier to go into battle, return, and bring more captured soldiers with it.
I literally imagine a $100 bill marching off into some medieval battle, returning with a captured $10 bill.
This visual works for me for two reasons:
1. Making sure my soldiers come back is part of the deal. They don't just get deployed somewhere forever - they need to come home. Risk adjusted returns are what matter.
2. None of my dollars gets to sit around and be lazy. Whether it's net worth in my primary residence, market appreciation in a rental property, or some capital waiting to get deployed somewhere, there's got to be a way to force those dollars to work. For me, that means responsibly leveraging every dollar I can.
Now, whether they're working at a 10%, 6%, or 3% rate ... there's a lot of other inputs I need for my math there.
I am watching Kevin O'Leary right now. That is why I have been 1031 exchanging my pricey condos in San Diego with those unpredictable HOA fees and making these soldiers get me a lot more money in my pocket every month. Of course I save virtually 80% of that cash flow and put it in a financial freedom bank account to capitalize on even more opportunities. Plus, I have forced appreciation on my apartment complexes by approximately $400,000 in a short 18 month to 2 year period and am not at the mercy of comps for my valuation on them. So, my cash flow has doubled on the way to tripling, along with that forced appreciation.
I critically look at my deals, with a shark tank scrutiny to bring myself, wife, mom, dad, and my investors a financially free future. I feel a duty, obligation, and responsibility and am guarding it with my life. When you start investing other people's money it gets real in a hurry and you feel the weight of the world, However, it feels so invigorating and just like I am participating on any of the many sports championships and excellent teams I have played on to win many championships.