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.
| Component | In cash-on-cash? | In ROE? | Is it cash? |
|---|---|---|---|
| Operating cash flow | yes | yes | yes |
| Principal repaid | as an outflow | as a gain | no, a transfer |
| Capital growth | no | yes | no, only on sale |
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.
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 purchase price.
| Component | Amount |
|---|---|
| NOI | € 11,074 |
| Interest | − € 9,908 |
| Principal | − € 2,943 |
| Cash flow | − € 1,778 |
| Principal added back (equity build-up) | + € 2,943 |
| Capital growth (2% of € 285,000) | + € 5,700 |
| Wealth gain | € 6,866 |
ROE = 6,866 ÷ 130,240 × 100% = 5.27%
| Metric | Value | What it means |
|---|---|---|
| Cash-on-cash | −1.36% | You top up € 148 a month |
| ROE | 5.27% | Your wealth grows by € 6,866 a year |
| Of which from growth | 4.38 points | Four fifths of the return is an assumption |
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
| Financing | Cash flow | Principal | ROE excluding growth |
|---|---|---|---|
| Annuity, 30 years | − € 1,778 | € 2,943 | 0.90% |
| Interest-only | € 1,099 | € 0 | 0.84% |
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. 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.
7. 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.
8. 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.