Rule of thumb on ROE?

Question

What is considered a good goal for return on equity in a property? I’m trying to construct a window when I should start messing with a property to move the ROE back up once it’s accumulated “too much” equity. For reference, I’m in the growth phase of real estate investing so maximizing my returns is a clear goal. I realize down the road letting if I am trying to simply pay mortgages off the ROE is no longer a useful gauge.

Wondering if anyone had some windows/rules of thumbs they use they would be willing to share.

Thanks!

Wondering if anyone had some windows/rules of thumbs they use they would be willing to share.

Thanks!

Ashish Acharya · Answer

A common rule of thumb for Return on Equity (ROE) in real estate is to aim for 8-12% or higher. When ROE falls below this range, it might be a sign that your property has accumulated too much equity, and you could consider options like cash-out refinancing, selling, or 1031 exchanges to redeploy that equity into higher-yielding investments.

During the growth phase, focus on maximizing returns by keeping your ROE within or above this range. Regularly review your property's performance, and if the ROE dips, explore ways to extract and reinvest the equity to maintain your investment momentum. Don't forget the tax savings in your ROE. *This post does not create a CPA-Client relationship. The information contained in this post is not to be relied upon. Readers should seek professional advice.

Ken Primrose · Answer

Thanks Dave, love the insight. This is what I was looking for. Thanks for taking the time.

Ken Primrose · Answer

Ashish, thanks for the reply. This is perfect a healthy window to shoot for.

Dave Meyer · Answer

Agree that 8-12% is a solid range, but also want to add that what is 'good' is relative to what you can get elsewhere. If you're only getting a 7% ROE, but a new deal would earn you a 5% ROE, you may want to just sit tight. Alternatively, if you're getting a 9% ROE but there are deals on the market that would earn you 12%, time to move that equity!

This is why I recommend investors always do what I call 'benchmarking.' Basically, just run deals in your market even if you're not planning to buy. It will help you benchmark your current portfolio against potential alternatives and make these types of decisions easier.