Return on Equity (Before Tax) is calculated by taking the Cash Flow Before Tax and dividing it by the Sales Proceeds Before Tax each year. The Sales Proceeds Before Tax represents the equity that you have in the property each year. The concept of this calculation is to evaluate whether selling the property and taking the equity from that sale to purchase another property would generate a higher return on that equity.
In the following example, to calculate the Year 5 Return on Equity, we take the Year 5 Cash Flow Before Taxes and divide it by the Year 5 Sales Proceeds Before Tax. In this example, we also have a mortgage which is amortized so the mortgage balance is reduced each year by the principal payments which in turn also increase our equity in the property.
Year 5 CFBT: $635,083
Year 5 SPBT: $7,301,372
Return on Equity in Year 5 is: 8.698%, rounded to 8.70%
This is shown on the Measures one Investment Performance: