What is Return on Equity?

And why does it DECREASE over time?

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Return on Equity

The longer you hold, the lower it goes?

Return on Equity is a bit tricky –  not because of the math – but in understanding how it is used. In short, RoE can help you determine when it may be best to refinance a property. 

What is RoE? As you hold property, it both appreciates in value (usually) and the remaining principle balance of the debt is being paid down (if you have an amortizing loan). Those two factors combine to build equity in the property. Assuming your income is flat (no rent increases), the same amount of income will be compared to an increasingly larger number, meaning the return will be less over time. The formula is similar to the ROI, except now you divide your net profit by the equity.

For an example and more explanation, click here.

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