How do I Measure my Investment Property’s Cash on Equity Return?
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Would you put all your money in a bank to collect low-interest rate? Probably not. But unfortunately, many investors who have owned their investment properties over time have exhausted depreciation (a major tax benefit), and are earning a disappointing annual return on their equity. The return (or growth) on investment (ROI) has done well over the years. However, the Return on Equity (ROE) that is your Income from it could be unknowingly poor.
Here is a simplified example of computing your ROE:
- Annual Gross Income = monthly rent times 12=$______________
- Annual Expenses = Include Monthly Mortgage Payments times 12, then add insurance, Property Taz, Maintenance, Utilities, and all other Expenses spent Annually. $________________
- Annual Net Income = Subtract 2 (expenses) from 1 (Gross Income) $_____________
- Estimated Net Equity of your Investment Property (Your REALTOR will assist you with this) $_____________
- To Arrive to your Property’s Approximate Cash on Equity Return, take 3 (Net Income) and divide by 4 (estimate Net Equity). This is your investment property’s estimate Cash on Equity Annualized Rate of Return ________%
Surprised? If your annual percentage rate of equity return is disappointing, perhaps it’s time to consider…..
- Refinance the property and acquire additional investment real estate which can grow in both ROI and ROE;
- Sell and Acquire superior properties via a 1031 Tax Deferred Exchange
The 1031 Tax Exchange is one of the last tax shelters allowed by the Internal Revenue Service. It is a transaction in which a taxpayer exchanges investment real estate for other investment property which allows one to defer the payment of Federal Capital Gains Taxes, The recapture of Depreciation Taxes, and California State Taxes. The IRS allows this for real property held for investment purposes or the productive use in a trade or business anywhere in the USA. This basically includes any real estate held for investment EXCEPT your primary residence or second family home. Now you can move forward into more profitable investment property with a greater percentage of equity return (ROE) and possibly a new adjusted depreciation schedule. For more info, just call!