- Joined
- Aug 30, 2007
- Messages
- 1,821
We regularly review our ROE for each of our properties, and I encourage clients to do this with their portfolios. This is an important consideration when deciding how well a property is performing and how it can be improved. Sometimes ROE can be brought up to snuff simply by re-financing the property that is under-performing, so your capital is working hard for you.
Investing in rental properties is a long-term game and the costs of selling are high. If your property is `normalized` and is financed as high as its financial performance will allow (meaning to still be cash-flow positive) you might be better off to sell if:
1) If you have a property that will not perform well financially in a normalized scenario (ie when rents & vacancies are achieved in a stable market and deferred maintenance has been caught up).
2) If you have a property that is delivering you a much lower Return On (Net) Equity than it should and you will not be able to raise income enough to resolve that. I am defining Net Equity as being the capital that you have tied up in the property less your expected costs of sale and capital gains tax. I calculate this by adding cash-flow + Vacancy & Maintenance allowances + mortgage pay-down and dividing that by the Net Equity.
I normally expect a ROE around 20% - but this is a number unique to me - you should have your own figure based on your specifics, your goals and your location in the investment cycle.
The ROE measurement keeps me focused on ensuring my capital is employed most efficiently in good solid real estate investments. And it reminds me when it is time to re-finance and take out more equity, which I can then put to work in another investment.
Investing in rental properties is a long-term game and the costs of selling are high. If your property is `normalized` and is financed as high as its financial performance will allow (meaning to still be cash-flow positive) you might be better off to sell if:
1) If you have a property that will not perform well financially in a normalized scenario (ie when rents & vacancies are achieved in a stable market and deferred maintenance has been caught up).
2) If you have a property that is delivering you a much lower Return On (Net) Equity than it should and you will not be able to raise income enough to resolve that. I am defining Net Equity as being the capital that you have tied up in the property less your expected costs of sale and capital gains tax. I calculate this by adding cash-flow + Vacancy & Maintenance allowances + mortgage pay-down and dividing that by the Net Equity.
I normally expect a ROE around 20% - but this is a number unique to me - you should have your own figure based on your specifics, your goals and your location in the investment cycle.
The ROE measurement keeps me focused on ensuring my capital is employed most efficiently in good solid real estate investments. And it reminds me when it is time to re-finance and take out more equity, which I can then put to work in another investment.