ROI vs ROE - What's the Difference?

Return on investment is totally different than retun on equity and it's important to understand the difference!

In general, your return on investment goes up while your ROE will go down over time. This is for two reasons.

First, rents tend to go up over time and the overall profits will increase over time. But, the investment you made initially will never change. So, your overall ROI will always go up.

Even though profits go up, your equity in the property will tend to increase faster. That's because not only is it appreciating, but your tenants are paying down the mortgage. This double effect increases the equity faster than the rent, making the ROE go down over time.

It's important to understand the return on investment vs the return on equity because you can use that to make investing decisions. You may not realize it, but over time you might want to reallocate your money to other investments if the ROE drops too low.

[NightFlight]

Hmm, on that principle when there is an economic downturn and your valuation goes down resulting in lost potential equity your ROE goes up!

[nathanf]

What exactly is profit when calculating ROI or ROE? Is it the profit on the profit loss statement of the real estate business or the actual money you get from the company (dividend or draw)?

Hope you understand what I’m trying to ask.

[patrickpelletier]

Oh! Interesting! Thanks for this, man! :)

[chinnzerglass]

Redo this with modern audio and video/editing.