ROI vs. ROE - When to re-evaluate a rental property?

[Jason Krawitz]

Let me paint a fictitious story for you to illustrate what I'm trying to ask.

10 years ago, I buy a property for 80k cash that rents for 1200/month. I'm happy with this ROI as I'm earning 1.5% of my investment each month in rent revenue. After expenses, I'm earning an annual ROI of 10%.

Today, that same property is worth 300k and rents for 1500/month. I'm still happy with my ROI which is now 12% net but my ROE stinks. I'm only making 5% annual ROE in rent revenue.

At what point does a buy a hold investor re-evaluate and which calculation holds more weight for you? ROI based on initial investment or ROE based on current market values?

[Kyle McCorkel]

Great question and will be interesting to see how this discussion unfolds.  Here's my take:

ROE is a measure of opportunity cost.  Meaning, could your cash be better used elsewhere? So in your example, if your ROE is only 5%, and you have other investment opportunities that can make more than 5% (ideally 10% or 15% or higher), then it is time to 1031 exchange into another property, or sell and put the money towards another type of investment.

Put simply: if your ROE is LESS than the ROI of another investment opportunity, it is time to consider selling.

Obviously you would also want to take transaction costs and taxes into account as well.