Calculating ROE to determine whether to hold/sell investment

[Edgar Garnys]

Hello,

I am attempting to calculate my Return on Equity to determine whether to hold or sell my investment over the next 10 years or so.  I would greatly appreciate anyone's expertise on this subject as I am a fairly new investor. 

Background and inputs that I used to calculate ROE:

This is a 3 unit Class-C property with an annual NOI of roughly $8,000.00 (I know it's not a big amount). I purchased the property for $105,000 with a down payment of $21,000 (20% of purchase price) one year ago. The yearly principal payment on the mortgage is approximately $1,200, which gets added on to the total equity accumulated. The price appreciation for the zip code that my investment is in is about 4% based on Zillow's Home Value Index data on their Research page. This is the average monthly percentage change (annualized) for about 23 years worth of data. I am also assuming that the annual growth rate for NOI is 0% (worst case scenario).

I used the following formula to calculate expected ROE each year for a 10 year holding period:

ROE = NOI/(Equity+Change in Home Value)

I have also renovated the property and added an additional unit for extra rental income. The additional income is included in the NOI calculation, but I am not sure how to account for the increase in market value from the renovation. Any thoughts here?

ROE:

Based on the inputs above, I get an ROE of approximately 30% for Year 1, 16% for Year 5, and 10% for Year 10. The total equity build-up over the 10 year period is about $33,000 (a $12,000 increase due to the principal I paid on the loan over 10 years). Also, the home value would appreciate to about $155,000 ($50,000 increase from the purchase price) after 10 years assuming that the value increases at a constant rate of 4% each year. 

Questions:

If I am satisfied with an ROE of 10%, should I sell my investment at any point considering the build-up in equity and the price appreciation? I am happy with the NOI it is generating, but I am not sure if I should pull out equity during this 10 year period to purchase a similar investment or if I should sell the property considering the increase in value. Would refinancing at any point be a good option so I can pull money out to purchase another investment? I am afraid if I refinance, the mortgage payment will become higher and it will be more difficult to cover the payment with rental income.

Let's say the home value does not increase given the hot market and prices potentially becoming stagnant, should I consider selling the investment if ROE remains at roughly 30% for 10 years?

What other measures would/do you use to calculate ROI on this type of property? I would appreciate any advice that you have!

Thank you,

Edgar