Return on Equity - Analysis and Strategy

[Andrey Y.]

I wasn't sure the appropriate subforum for this topic, since a few seem relevant.

I decided to calculate ROE on 3 properties I own in Oahu, Hawaii. I used exact mortgage balance and used in-building comps to calculate market value (all 3 are condos). I included all expenses, maintenance fees, and a healthy repairs reserve (which I have never came close to using in 4 years) to calculate net cash flow.

Numbers are below:

Property #1: Equity = $202,815 Net Cash Flow = $10,270 ROE = ~5.1% {~56% LTV}

Property #2: Equity = $103,284 Net Cash Flow = $6,109 ROE = ~5.9% {~57% LTV}

Property #3: Equity = $90,588 Net Cash Flow = $2,475 ROE = ~2.7% {~61% LTV}

What do you guys think of these ROE numbers? To me they seem quite low (especially the 3rd property). Do you recommend selling, maybe 1031 into an apartment building somewhere else? 1031 into several SFH rentals, geographically diversified? Stay put?

I am open to selling the second and third properties. The first, probably I will never sell because its in a desirable area on the beach. Would you refinance any of them?

I listed the LTVs above. I actually realized, I am under-leveraged for my level of risk (I think?). Thank you for reading.

[David Faulkner]

It always seemed strange to me to consider only ROE on an appreciating asset, where most of that equity was not capital you put in (I doubt you put 40%+ down at purchase), but was equity "created" by market appreciation, and it would not exist at all if there was no appreciation and then ironically the ROE would look much better in that case, but not in reality with total return ... not saying ROE is a bad metric, only that like with all metrics it should be considered in context of a complete analysis ... each metric tells you something but also has its limitations. Understanding what each metric can and cannot tell you, and combining them in such a way that you get a complete picture is the key ... this takes experience and frankly can be as much art as it is science.