Return On Equity (ROE)

Return on equity, also known as ROE, is a ratio of net profit divided by equity. Investors use this ratio to determine how profitable an investment is. This calculation be applied to monthly or annual profits. In real estate, return on equity often refers to the profits made in investment properties. Take for example a single family residential property. The owner of the property has $50,000 in equity on the property. The tenant pays $1,500 per month in rent on the property. After paying maintenance, taxes, and insurance on the property, the owner nets $500 in profit. The monthly return on profit is $500 divided by $50,000 or a 1 percent return on equity. For the year, it would be 12 percent return on equity. This calculation changes as rents increase the amount of profit and as equity grows due to mortgage payments.