How do I increase my return on equity in my rentals?

2 Replies

I'm a realtor and investor of 20 years in TX. After listening to a BP podcast I decided to run the numbers on 13 of my rental homes to get my return on equity. From dividing my cash flow of $79,000/year by my equity of $1,350,000 my return on equity was 5.8% The homes ranged from -1% to 12% return. What pointers do you have for increasing my return on equity? What is a good goal for return on equity?

Thanks

Mike

From my seat, ROE HAS to be greater than passive alternatives, like the long-term return of the stock market. Otherwise, why am I bothering with real estate and all the work involved?

ROE, however, is not just cash flow. Imagine that your portfolio is valued at $3,000,000. Your equity is $1,350,000. If the market appreciates 3.5% over the next year, then your asset value is $3,100,000. Your equity (before loan amortization) is $1,450,00. This is a 7.4% addition to your 5.8% from cash flow. If you pay down principal on your mortgages, you might get another 2-3%.

If we add these up, we might see a ROE of the following:

5.8% from cash flow

7.4% from appreciation

2.5% from loan amortization

ROE of 15.7%

Assuming I'm in a reasonable ballpark in guessing at your debt structure, this is in the range of what I think real estate investors should shoot for. 

The most practical ways to increase your return on equity are:

- Increase rents or reduce operating expenses to produce more cash flow

- Refinance your property, pulling equity out

- Sell homes or properties that are producing, or which you expect to produce low ROE, and purchase new ones with higher expected returns

Hope this helps! 

Sell the properties and reinvest.  Equity stays the same...just living in different locations.  Cash flow goes up since (I'm assuming) you would now be looking at 20% equity on the new properties, which should mean more properties...and higher cash flow.  Ration increases...probably substantially. 

Also, why are you hanging onto properties with only 1% ratio in the first place?  I can't imagine the cash flow is much at all.