Return on Equity Calculator for Rental Property

1. Short answer

Return on equity (ROE) adds up everything your wealth gains in a year, cash flow, principal repaid and capital growth, and divides it by the equity you put in.

ROE = (cash flow + principal + capital growth) ÷ equity invested × 100%

The same apartment with a cash-on-cash of −1.36% produces an ROE of 5.27%. Both figures are correct and describe the same property in the same year. They simply measure different things: one what happens in your account, the other what happens to your wealth.

2. Why ROE and cash-on-cash diverge

Cash-on-cash is strict: only money in and money out. Principal counts as an outflow there, because it leaves your account. But it does not disappear, it moves into your equity in the property.

ROE corrects for that and adds capital growth. That makes it more complete, but also softer: two of its three components are not cash.

On an interest-only loan with no capital growth, ROE and cash-on-cash are identical. That is not a coincidence but the definition: the other two components are then zero.

3. The formula, component by component

Cash flow. NOI minus interest minus principal. Can be negative.

Principal. The part of your payment that reduces the balance. On an annuity this grows every year; on interest-only it is zero.

Capital growth. The hardest part, because it is an assumption. Use a percentage you can defend, and show what happens without it: that is the honest floor.

Denominator: equity invested. What you put in at purchase, including acquisition costs. Some use current equity (value minus outstanding debt), which makes ROE fall each year as you build equity. Both are defensible; just say which you use.

Required equity: what you actually have to find. That denominator has a name of its own and a simple derivation: total investment minus the loan.

required equity = total investment − loan amount

Note that this is not "purchase price minus loan". That version omits the acquisition taxes and fees a lender will not advance against, and on the property above it understates the requirement by more than € 44,000. It is by far the most common error when planning your own contribution, and it flatters every return percentage that divides by it.

On a development or conversion scheme there is a further deduction. Where interest is rolled up onto the facility rather than serviced during the programme, that interest is a genuine project cost but not a cash contribution from you: it is settled out of the sale proceeds. Required equity there is total cost minus the loan minus that rolled-up interest. On a straightforward rental purchase the question does not arise, because holding-period interest never enters the investment total in the first place.

Finally, do not confuse required equity with your peak funding requirement. Interest and fixed costs run from completion, while rent may not start for months, and that money has to be available too. The peak therefore sits above the equity figure, and it is the peak that determines whether a scheme is deliverable at all.

4. Worked example

The same apartment: NOI € 11,074, a € 199,500 loan at 5.0% as a 30-year annuity, equity of € 130,240. Capital growth: 2% a year on the € 285,000 property value.

ROE = 6,866 ÷ 130,240 × 100% = 5.27%

That last row is the most important on this page. Of the 5.27%, some 4.38 points come from an assumed growth rate. Drop that assumption and 0.90% remains: the part that does not depend on the market.

5. Without capital growth

Almost identical, and that is the point. Repayment type moves return between "cash" and "wealth", but does not create it. Choosing between interest-only and annuity is choosing between liquidity now and equity later, not between a higher and a lower return.

6. ROE on a development project

On a development project ROE is a different figure, and it matters how different. There is no annual cash flow and no annual capital growth; there is one profit at the end. The development calculator therefore computes:

ROE = project profit ÷ equity required × 100%

On the conversion project used on the ROI and loan-to-cost pages, with € 107,800 of profit and € 258,825 of equity, that is 41.65%.

The leverage factor is total project costs divided by your equity. Of those 3.18 euros, 1.00 is yours, 2.03 is borrowed principal and 0.15 is rolled-up interest settled only at sale.

This is not an annual return, and that is the trap. The 41.65% runs over eighteen months. Divide it linearly by one and a half and you get 27.8% a year, which is too high: compounding is not linear. Annualised it is 26.13%, which is exactly the equity IRR on the IRR page. So never compare the ROE of a development project directly with the rental ROE above: they are two different time windows under one name.

With no equity there is no ROE. At 100% financing you divide by zero, and the tool then shows "not available" rather than an invented 0.0% that would be indistinguishable from a project genuinely returning nothing. A project with equity and a disappointing profit simply shows a negative ROE: a real loss, not a malfunction.

The rental calculator computes the ROE this page describes. The field there counts all three components: cash flow, principal repayment and capital growth, divided by your own contribution. Cash-on-cash sits alongside it as its own figure, because it answers the other question. If you see a rental ROE identical to your cash-on-cash, that is an outcome rather than a label: with an interest-only loan and no capital growth the other two components are zero, so the two figures coincide by definition. As soon as you amortise or assume any growth, they diverge.

7. Three mistakes that distort the number

Including growth without saying so. An ROE of 5.27% and one of 0.90% on the same property differ by a single assumption. Always state the percentage.

Double-counting principal. It comes off in cash flow and back on as equity build-up. Adding it without first deducting it overstates the result.

Letting the denominator move silently. Using current equity makes ROE fall each year while your position actually improves. Not wrong, but worth stating in comparisons.

8. Run your own numbers

Enter your own figures above, including the growth rate, so you can see how much weight that assumption carries. For a multi-year view with rent indexation, repayment and exit, the BRIX Calc rental calculator models it.

9. Frequently asked questions

Is ROE the same as cash-on-cash?

On an interest-only loan with no capital growth, yes; principal and growth are then both zero and only cash flow remains. In every other case ROE is higher.

Why is my ROE high while I top up every month?

Because two of its three components are not cash. Principal and growth increase your wealth without money reaching your account. That is a real gain, but it will not pay your monthly costs.

What growth rate is reasonable?

There is no answer that holds for every market and moment. The honest approach is two scenarios side by side: one at 0% and one at your own assumption. The gap shows exactly how much of your return leans on the market rather than the property.

Should tax be included?

Not in the standard calculation, as with cash-on-cash. That keeps the figure comparable between investors with different tax positions.

Why does the ranking sometimes reverse on an amortising loan?

Because ROE counts principal as a gain. A linear or annuity loan repays more than an interest-only one, raising wealth build-up while lowering cash flow. Over a short holding period that can make an amortising form look better on ROE while it is worse on cash flow. Never read ROE on its own.