Investors: Calculate Cash-on-Equity Return on a Rental Property (Simple Guide)

Waiting for New Occupant

💡 How to Calculate Cash-on-Equity Return on a Rental Property (Made Simple)

If you already own rental property, you're probably building equity—but do you know how much return you're getting on that equity? Many investors are surprised to find out their true situation.

That’s where Cash-on-Equity Return (also called Return on Equity or ROE) comes in. It helps real estate investors track how well their money is working as the property's value (and your equity) increases over time.

In this post, we’ll explain in simple terms how to calculate it—and why it’s so important for long-term rental property investing.  

🧮 What Is Cash-on-Equity Return?

Cash-on-equity return measures how much annual profit your property is generating compared to how much equity you have in it. It answers this question:

    "How much income am I earning from the money I currently have tied up in this property?"

This is especially useful after you've owned a property for a few years, when the value has gone up and your mortgage balance has gone down.  

📊 Why Cash-on-Equity Return Matters

When you first buy a property, you may focus on cash-on-cash return—your return based on your original investment. But over time, your equity grows, and cash-on-equity return helps you decide:

    Should I hold this property?

    Should I refinance to pull out equity?

    Should I sell and reinvest for better returns?

✏️ How to Calculate Cash-on-Equity Return
    📌 Formula:

    Cash-on-Equity Return = Annual Cash Flow ÷ Current Equity
    Annual Cash Flow = Net income after all expenses and mortgage payments
    Current Equity = Property’s current market value – loan balance

       🏡 Example:

    Let’s say you’ve owned a rental property for 5 years. Here's where things stand:

    Current Market Value: $500,000
    Remaining Loan Balance: $300,000
    Equity: $500,000 – $300,000 = $200,000

    Now let’s say your annual cash flow after all expenses and loan payments is:  $8,000 per year

    Calculation:  $8,000 ÷ $200,000 = 0.04 or 4%

    ✅ Your Cash-on-Equity Return is 4%  

🚩 What’s a Good Cash-on-Equity Return?

There’s no universal "perfect" number, but here’s a general guide:

    Under 4%: Your money might work better elsewhere
    4–6%: Average for stable, long-term rental properties
    7% or more: Strong performance, especially for turnkey or low-maintenance units

If your cash-on-equity return drops too low, it may be time to consider:

    Refinancing to pull out cash and invest elsewhere
    Selling and exchanging into a higher-yield property (1031 exchange)
    Renovating to raise rents and increase income

🛠️ Pro Tip: Reevaluate Your Equity Every Year

Many investors forget to recalculate their returns as property values rise. Even if the rent stays the same, your equity grows, which could lower your return if income doesn’t increase with it.

Set a reminder to check your cash-on-equity return annually—it’s a smart habit for every real estate investor.  

🏁 Final Thoughts: Know What Your Equity Is Earning

Understanding cash-on-equity return helps you make smarter decisions about your portfolio. Whether you’re holding, refinancing, or thinking about selling, this number tells you if your equity is doing enough for you—or if it’s time to reinvest for better returns. Do you need to refinance or sell and acquire a superior property via a 1031 Tax Exchange?

📞 Need Help Evaluating Your Rental Property’s Performance?
Would you like an estimate of your current property equity, and the 5 Steps Guide in calculating return on equity?  Huntsman Properties will help investors assess their cash flow, equity, and long-term ROE.  Whether you're thinking about holding or reinvesting, Huntsman Properties will run the numbers and guide you every step of the way.

Julia Huntsman, REALTOR, Broker | http://www.abodes.realestate | 562-896-2609 | California Lic. #01188996

What Is the California Tax Withholding for Buyers and Sellers?

Kitty says "Keep your eye on your withholding tax"

Very often sellers are unaware of this California tax withholding requirement to pre-pay their tax due on the gain of their property, and may equate it with capital gains tax or property taxes.

For income property sellers, and those doing property exchanges, installment sales and other transfers, this information may be most important:

The escrow officer must notify the buyer of his/her responsibility to withhold 3 and 1/3 percent of the gross sales price of real property sale, whether by an individual or non-individual such as an LLC, corporation, trust, etc., and pay it to the Franchise Tax Board, UNLESS an exemption applies.

The exemptions include sales less than $100,000; property last used as a principal residence; sales of decedent's principal residence by the estate; sale by 1031 exchange; seller's tax liability, calculated at the maximum rate (currently 12.3%) on the taxable gain, regardless of seller's actual rate, will be less than 3 1/3% of the gross proceeds and seller certifies that fact under penalty of perjury. 

For sellers in the pre-listing stage who are wanting to calculate their ultimate seller's net after a sale should be sure to give all such information to their tax adviser, if that is who is doing their calculations. Escrow is responsible for notifying the buyer of their responsibility to withhold, and the buyer must do so when escrow closes.  If the seller's actual tax rate is different than 12.3% above, then they need to consult with their tax advisor on the status of their particular state income tax requirements. 

See more information from the Franchise Tax Board  .


Julia Huntsman, REALTOR, Broker | www.juliahuntsman.com | 562-896-2609 | California Lic. #01188996

A Tax Change in 1031 Exchanges Would Ultimately Affect Everyone

IRS Section 1031 Like-Kind Exchanges have existed since 1921 for the purpose of avoiding unfair taxation of ongoing investments in property, and to encourage active reinvestment in property.  While the most common image of doing a 1031 exchange is a transaction of selling one real estate property and exchanging into another real estate investment property, like-kind exchanges result in many types of property transactions. The exchanges are a stimulus to many sectors of the economy, i.e., not only for real estate professionals, but also contractors, title insurers, lenders, equipment dealers/manufacturers, transportation, energy and agriculture.  

The benefits of the current 1031 exchange allows for deferral of capital gains taxes on property sold when it is exchanged into "like-kind" property without cash being taken out (which would invalidate the exchange) and thereby allowing for new investment. Americans pay less for products and services because of this type of reinvestment on products such as single family and multiple family home rentals, public transportation fleets exchanged into new buses, trains, taxis, etc., airlines exchange their planes and rental cars--all of which dealt with through this 1031 exchange system which keeps costs lower for the consumer. Farm machinery, mining equipment, art collectible, boats, oil and gas equipment, and business asset trade-ins are all impacted by 1031 exchanges.

According to Fidelity National Finance Company, 

"The last major tax reform was in 1986. At that time, Congress repealed the ability to take passive tax losses in real estate.  An unintended consequence of this change was the ensuing real estate recession and the demise of the savings & loans industry. This eventually tipped the country into the recession of the early 90’s.  Section 1031 is bigger than passive losses. In some U.S. markets, real estate brokers claim that 1031 Exchanges touch at least 45% of the real estate investment transactions."

                                                                                * * *

"Ernst & Young, LLP released a macro-economic study on the impact of repealing or limiting 1031 exchanges in 2015 that quantified that the US economy would actually contract if Section 1031 was repealed or limited, finding that GDP would be reduced by approximately $8.1 billion per year."

Elimination, restriction or changes that would effectively block 1031 exchanges in any contemplated "tax reform" could negatively affect much of the current American economy.  The 1031 exchange is not only important on the large business economy scale, but is one of the few tools small business owners and small apartment owners have to maintain their capital investments over time.

 See more at these sites, which also include ways to contact your Congressional representative:
10 Reasons for a 1031 Exchange
Fidelity National Finance Company 
1031 Corp
Commercial Observer

Here Are 5 Good Reasons to List Now

Have you thought about selling your investment or residential property over the last five years? Here are five reasons now may be the time.
1. We are experiencing selling price increases, so the market may be much different now compared to when your property was last for sale. Here are some statistics, according to California Regional Multiple Listing Service data: Long Beach average home prices rose by 6.6 percent, and the median home price rose 8 percent, over the last 12 months through December 2016. The California home price average is expected to increase by 4.6 percent in 2017.
2. The inventory of available homes for sale continues to decrease from what it was just one year ago, making the competition among sellers considerably lower. The local market as of December is at 1.6 months or less of inventory (6 months is the traditional norm). 
3. Mortgage interest rates are still at record lows, in December only slightly higher than the lowest of all rates which was also in 2016, making homeownership more affordable and bringing new buyers into the market. And where are sellers moving to? There were over 24,000 sales in the top 50 master-planned communities in the country in 2016, an increase over 2015.
4. Rental rates are still rising dramatically for tenants. And if you bought a rental property after 2008-2010, you probably have some price increase in case you're thinking of a 1031 exchange.
5. While we cannot predict the affordability of the 2017 market completely, more millennial buyers (under 34 years) and buyers returning to the market from years of renting are entering the homebuying market. I handle the headache and also work closely with clients in selling homes for out-of-state owners. You can even leave your tenant in the home in many cases.
Contact me for a free valuation of your property or to find out what makes me different from my competition.