Net operating income, rent growth, and property value matter — but ROE is the metric most LA owners are missing when they decide whether to hold, refi, or sell.
What Return on Equity (ROE) Means
Return on equity measures how much return your *current equity* in a property is generating.
Many real estate metrics focus on the *initial investment*. ROE is different because it focuses on the value of your equity *today*.
In simple terms, the metric answers a practical question:
*If you sold the property today and redeployed that money elsewhere, what return might you expect?*
That's why ROE is so useful. It allows investors to measure how efficiently their equity is performing right now.
How to Calculate Return on Equity
The basic formula is:
ROE = Net Income ÷ Current Equity
Where: - Net Income includes cash flow + loan principal paydown - Equity = Property value – loan balance
This equation captures the different ways real estate builds wealth over time: income from rents, debt paydown, and appreciation.
A Real-World Example
Imagine a multifamily property you bought for $800,000 with a $600,000 loan. Today it's worth $1.6M, and your loan balance has dropped to $450,000.
Your equity is now $1,150,000. If your annual cash flow plus principal paydown totals $46,000, your ROE is roughly 4%.
That might have been acceptable five years ago. But in today's market, that same equity could potentially earn a higher return through a value-add acquisition, a 1031 exchange into a larger asset, or even conservative reinvestment.
When ROE Declines, It's Time to Reassess
Los Angeles property values have exploded over the past decade. Even owners who consistently raised rents may find their return on equity has declined simply because property values increased faster than rental income.
That's why it's important to perform ROE analysis regularly — at least annually — to evaluate whether holding that equity in a particular property still makes sense.
Sometimes the best move is to hold. Sometimes it's to refinance and pull capital for another deal. And sometimes — especially when ROE has compressed below 4–5% — it's to sell or exchange into a higher-performing asset.