 |
| 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
