Return on Equity in Real Estate: How It Differs From Cash-on-Cash
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Return on equity (ROE) in real estate is the yearly return divided by the equity currently in a property, usually its market value minus the loan balance; cash-on-cash return divides the same cash flow by the cash originally invested. ROE answers "how hard is the money tied up in this building working today?", while cash-on-cash answers "how is my original investment doing?".
A worked example (hypothetical)
| Topic | At purchase | Five years later |
|---|---|---|
| Equity invested | $2,000,000 | $2,000,000 |
| Value minus loan (current equity) | $2,000,000 | $4,000,000 |
| Yearly cash flow | $160,000 | $200,000 |
| Cash-on-cash (on original equity) | 8% | 10% |
| Return on equity (on current equity) | 8% | 5% |
Cash-on-cash looks better each year, but the $4,000,000 of equity now earns only 5% in cash. That is the "lazy equity" a cash-out refinance or a sale can put back to work.
What do owners do with a falling ROE?
- Refinance to return part of the equity to investors while keeping the building: see refinancing a syndicated apartment.
- Sell and return capital and profit: see syndication exit strategies.
- Hold when taxes on a sale, loan terms or the market make that the better choice.
ROE leaves out appreciation unless you add it; for total return over a hold, see equity multiple, IRR and cash-on-cash and how to calculate cash-on-cash.
How DoorRaise fits in
On DoorRaise, sponsors raise equity for apartment buildings from their friends and followers under Rule 506(b) or 506(c), and DoorRaise verifies that every investor is accredited before they sign, in both. Investors fund by wire into the deal's escrow account at Enterprise Bank & Trust, and quarterly distributions and updates are the default. DoorRaise does not hold investor money or give investment advice.
FAQ
Is ROE the same as cash-on-cash?
Only in year one; after that ROE uses current equity and cash-on-cash uses original equity.
Does ROE include appreciation?
The simple version uses cash flow only; some owners add principal paydown and appreciation.
Does a low ROE mean a bad deal?
No. It often means the deal did well and built equity; the question is whether that equity should be freed.
Sources
This article is general information, not legal, tax or investment advice. Every investment can lose money, and distributions are not guaranteed. DoorRaise is not a law firm, broker-dealer, investment adviser or funding portal.