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What Every Real Estate Investor Needs to Know About Cash Flow... And 36 Other Key Financial Measures, Updated Edition, 2nd Edition by Frank Gallinelli

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CHAPTER 31Calculation 25: Return on Equity

What It Means

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.

How to Calculate

First method:

Return on Equity = Cash Flow after Taxes / Initial Cash Investment

Second method:

Return on ...

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