There are two ways of approaching the topic of return on equity (ROE) as it applies to real estate investments. In each of them, “return” has the same meaning: cash flow after taxes (CFAT). What differs is the meaning of “equity.” In the traditional method, the equity is your initial cash investment. In the alternative technique, it is your initial cash plus the additional equity that has built up due to amortization of the mortgage and to increase in the value of the property.
The ROE is expressed as a percentage and typically is calculated for the first year only.
Return on Equity = Cash Flow after Taxes / Initial Cash Investment
Return on ...