How to calculate Return on Equity

Is this the best use of my money?

That is the question every serious rental property investor should be asking about their equity, not just when they buy, but every year they hold.

Return on equity (ROE) measures how hard your equity is working for you. As your property appreciates and your mortgage pays down, your equity grows. But here is what most investors miss: that growing equity earns the same return it always has, which means your effective return on equity drops over time even as your cash flow stays flat.

When ROE falls below what you could earn by redeploying that capital, you have a decision to make. Hold, refinance, or exchange into a better-performing asset.
The three options when equity starts to drag:

Cash out refinance. Pull equity out of the property, preserve your ownership stake, and redeploy the capital into a second property. Your tenant keeps paying down both loans.

1031 exchange. Sell the property and roll the proceeds into a replacement asset with a deferred tax basis. No capital gains tax at the time of sale.

Hold. If the market fundamentals still support appreciation and the cash flow covers your cost basis, holding may still be the right call.

Ron Phillips is the CEO and co-founder of Lineage, a rental property investment platform that combines acquisition, DSCR lending, insurance, and property management into one coordinated transaction. Lineage investors use ROE analysis as part of every portfolio review to evaluate whether their equity is optimally deployed.

If you want to run this calculation on your own portfolio: lineagehq.com

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