Here is one of the hardest decisions in property investing. You own a flat worth £250,000. You bought it for £150,000. Your equity is £150,000. It is cashflowing modestly. Should you sell?
Return on equity gives you the answer.
ROE measures your annual net income as a percentage of your current equity, not your original investment. It answers the question: if I had £150,000 of cash sitting in this property, could I earn more by putting it somewhere else?
Let us do the maths. Your flat generates £4,000 a year after all costs and mortgage payments. Your equity is £150,000. Your ROE is 2.7%. That is poor. You could sell the flat, pay capital gains tax, take home £130,000, and reinvest it in a property that delivers 6% cash-on-cash, giving you £7,800 a year instead of £4,000.
ROE naturally declines as your equity grows unless rents keep pace with property values. A property you bought five years ago might have doubled in equity while rents only went up 20%. Your ROE has halved, even though your property is worth more.
This does not mean you should automatically sell. But you should regularly calculate your ROE on every property in your portfolio. When the number drops below 4% or 5%, you need a good reason to hold. That reason might be future capital growth, portfolio diversification, or sentimental attachment. But you should know the number before you justify keeping a low-performing asset.
The formula
ROE (%) = (Annual Net Income / Current Equity in Property) × 100
Why this matters
ROE is the metric that separates holders from sellers. Calculate it annually on every property. When ROE drops below what you could earn elsewhere, selling starts to make mathematical sense.
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