What's the difference between ROI and ROE?
Reading an article recently on a novice property investor who was reflecting on his journey, he noted that he 'didn't even know the difference between ROI and ROE'.
I have been absorbing copious amounts of information for some time now about property investment including the finances as I look to expand my portfolio, and confess that I have not come across the term ROE. So I researched it, and here it is, for those of you who aren't aware.
Return on investment is the net income from your business (in this case property) divided by the total money invested in the venture multiplied by 100. If, for example, you spend £100,000 on your property and got £5,000 profit, your annual ROI equals £5,000 / £100,000 x 100 = 5 percent. When calculating ROI, the investment will include all borrowed funds.
Return on equity is calculated by dividing the net income by the equity of the investor and multiplying the result by 100. In the example above, say you have a 75% ltv mortgage, your equity is £25,000, so ROE equals £5,000 / £25,000 x 100 = 20 percent.
In the example, for every pound invested you have made 20p, while the ROI tells us that for every pound of combined assets and loans invested, you will yield a 5p profit.
Like I say, ROE is not a metric I've used or heard talked about with reference to property. I like that it takes into account assets and liabilities (ie mortgages), but am wary that more highly-leveraged properties could show a skewed higher-than-expected figure. I'll be concentrating more on ROI, but like a man in orthopaedic shoes, I'm happy to stand corrected.
