Return on Equity: The Two Numbers Every Owner Should Run

On Monday night, October 5, in Brandon, Florida, I stood in front of a room of owners at Tampa Bay REIA and asked one question. What did your equity earn last year? Not your property. Your equity.

Most owners know their cash flow on every building. Almost none know what their equity earned, and fewer still know how far their income can fall before a building stops covering its own debt. Those are the two numbers I taught that night. The slides are right below, and the rest of this post walks through them along with the market research behind them.

Return on equity tells you when your equity has gone to sleep. It does not tell you whether you survive the move. No return figure without the survival figure beside it.

One note before the math. The examples in this post are arithmetic on round numbers, not advice. The market figures are a snapshot taken in the first week of October 2026, and the sources are listed near the end.

The First Number: Return on Equity

Return on equity is cash flow after the mortgage, divided by the equity you could walk away with. It counts cash flow only. It leaves out loan paydown and appreciation.

Take one building. It is worth $500,000 and carries a $200,000 loan, so the owner holds $300,000 of equity before selling costs and taxes. It brings in $34,000 a year after expenses. Mortgage payments take $14,000 of that, which leaves $20,000 of cash flow. Divide $20,000 by $300,000 and that equity earned 6.7%.

Now go back to the day the owner bought it.

Same building. Bigger check. Each dollar of equity earns less. I call it the equity drain. The check doubled and the return on each dollar fell by a third. Nobody did anything wrong, which is why nobody notices. That is how a good property turns into a lazy one.

The drain is national. US home prices are up 54% since February 2020. Mortgage holders across the country sit on a record $18 trillion of equity. Rents have not kept pace. The national median apartment rent is down 0.4% from a year ago and vacancy is 7%. Values ran. Rents stalled. Equity went to sleep in many markets.

If you have never run this on your own buildings, you can run your return on equity on the calculator in a few minutes.

The Second Number: Margin of Collapse

When an owner sees 6.7% on $300,000, the instinct is to move the equity. Refinance it. Sell one to buy two. Before anyone moves equity, they should run a second number.

Margin of collapse is how far income can fall before the building stops covering its debt. Divide the mortgage payments by the income after expenses, then subtract the result from one. That is the survival figure.

On the same building, $14,000 divided by $34,000 is 41%. One minus 41% is 59%. Income after expenses can fall from $34,000 all the way to $14,000 before that building stops covering its debt. That is 59% of room.

There is a line on our platform that I stand behind. Leverage without a survival metric is malpractice.

One Refinance, Both Numbers

Here is the same building before and after a refinance to 75% of its value, on a 30 year loan at 7%.

Same building. Same income. The only thing that changed is the loan.

The owner pulled out $175,000. That cash has to earn 9.1% a year just to bring the cash flow back to $20,000. And the building can now lose only 12% of its income after expenses before it stops covering its debt. It was 59%. Expenses do not fall when rents do, so the room measured in rent is smaller.

That is the whole talk in one table. Return on equity told the owner the equity was asleep. It did not tell the owner whether they survive the move.

Two footnotes. Many apartment lenders want debt coverage of about 1.20 to 1.25, so a loan at 1.14 may not get approved at all. That is the lender running the survival number for you. And 7% is not a high assumption. The average 30 year home mortgage rate was 7.28% on October 1. At that rate the hurdle rises from 9.1% to about 9.6% and the margin of collapse falls from 12% to about 9%.

Compared With What?

The cash that came out has to go somewhere, and 9.1% is the bar it has to clear. So compare. Look at what the same dollars earn in other places, and look just as hard at what can go wrong in each one.

The rows are not like for like. The stock figure includes price gains and dividends. The building figures count cash flow only.

The stock market has a return figure and a survival figure too. The S&P 500 is up 12.8% in 2026 through October 2, when it closed at 7,722.72. Since 1928 it has averaged about 10% a year including dividends. It also fell 56.8% from October 2007 to March 2009. On October 2 stocks were priced at 41.4 times their ten year average earnings. The record is 44.2, set in December 1999.

I am not recommending any of these. They are benchmarks, not advice. The point is the last row. After the refinance, the equity left in the building earns less in cash flow than a Treasury bill pays.

What This Year Taught Me

I have made this kind of move twice.

In 2019 I started with hard money. The market grew into it and I got into 5% debt. At 5%, time was on my side.

In 2025 I pulled equity and bought on bridge debt at 11.5%. At 11.5%, time is on the lender's side.

Same move. Different rate. That is why my focus this year is finishing what I already own, and why every return figure I look at travels with its survival figure.

Look at what money cost in the first week of October. The average 30 year fixed mortgage was 7.28% on October 1. It was 6.34% a year earlier and 2.65% at the low in January 2021. The 10 year Treasury closed at 5.28% on October 2. It was 4.10% a year earlier. At its September 16 meeting the Federal Reserve raised its target range a quarter point, to a top of 4.00%. That was the first increase since 2023. Inflation is 3.4%, unemployment is 4.2%, and the economy grew at a 2.2% annual pace in the second quarter. Rates are rising again.

Buildings feel it. Apartment buildings sold at an average cap rate of 5.79% in the second quarter of 2026, the highest since 2015. It was 4.64% in the second quarter of 2022. Ten year apartment loans from Fannie Mae and Freddie Mac run from 6.20% to 6.90%. The delinquency rate on apartment loans held in commercial mortgage bonds was 8.04% in September, up from 6.59% a year earlier.

Debt now costs more than buildings yield. New leverage lowers the return and the room for error together.

Three Checks Before You Sell One to Buy Two

Selling one building to buy two is called pyramiding. Pyramiding is not the problem. Skipping the checks is. Before you sell one to buy two, answer three questions.

1. What does the new debt cost each year, in dollars? Dollars, not percentages.

2. Is the cash to finish the work in the bank before you start?

3. Who manages it?

Pyramiding still works when the two you buy pass all three.

The market data shows why the checks matter. Start in Tampa Bay, where the ground is softer than it was. The median single family price in Hillsborough County is $419,900, down 0.8% from a year ago. Apartment rents are down 2.8% in Tampa and 5.0% in Brandon. Stabilized apartments across Tampa Bay are 91.4% occupied, with 8,355 more units under construction. Unemployment in the Tampa metro is 4.7%, up from 4.3% a year ago. The relief is insurance. The average Florida homeowners premium is $3,736 a year, and insurers' latest rate requests average a 4.8% cut.

Softer rents and more supply squeeze income after expenses. That moves the margin of collapse before you ever touch the loan.

Now put Tampa next to Cleveland and Jackson, two of the markets I operate in.

Against home values, rents run more than twice as high in Cleveland and Jackson. That is rent before taxes, insurance, vacancy, repairs, and management, so it is not a return. It is the reason cash flow owners look there. The other side is the last row. Both cities are losing people, which is why the third check is who manages it. I wrote about reading the people in a market in REAP Principle 43 on the power of demographics.

Real Estate's Strength Today: Passive Losses

Some owners buy real estate for the tax losses, so I named them plainly. For rental housing, the building is written off over 27.5 years. The land is not. For qualifying property acquired after January 19, 2025, bonus depreciation is 100%, and that rule is now permanent. It covers the short lived parts of a property, such as appliances, carpet, and fences. That can turn a year of positive cash flow into a loss on paper. I covered how owners find those parts in the tax strategy most property owners overlook.

Then come the limits. Owners who take part in the decisions and hold at least a 10% stake can use up to $25,000 of those losses a year against other income. That allowance phases out between $100,000 and $150,000 of modified adjusted gross income. Beyond that, passive losses offset passive income only. They do not offset wages and they do not offset interest income. Qualifying real estate professionals who materially participate in their rentals are an exception. Unused losses carry forward to later years. They are released in full when you sell your entire interest in a fully taxable sale. The depreciation you took is taxed back at that sale.

A paper loss can lower a tax bill. It does not make a mortgage payment. This is general information, not tax advice. Ask your CPA how it applies to you.

The Best Return Is Usually Inside What You Already Own

Score every building you own before you buy another one. For most owners the best dollar is finishing or fixing what they already have.

A vacant unit turned. A renovation finished. An expense line cleaned up. Each one raises income after expenses, and that is the line both numbers start from. More income after expenses means more cash flow and more room before the building stops covering its debt. If you want a scorecard for this, Principle 45 shows how to score every asset on time, energy, and income.

The Two Seats That Get Paid First

In every building two seats get paid before the owner. The bank gets paid. The manager gets paid. The owner gets what is left.

Some owners with sleeping equity do not want another job, and they look at lending in place of owning more. That seat carries risks of its own, and it comes with its own questions. These are the questions any lender should ask of any borrower.

1. What position am I in?

2. Who is ahead of me?

3. What is the collateral worth today?

4. Does the operator report every month?

A lender who cannot answer all four is guessing.

The Takeaway

Freedom of time. Family security. Legacy. That is what the two numbers are for, and it is why I never read one without the other. The return figure builds it. The survival figure keeps it.

Two questions follow from all of this. What return on equity should you be getting? I do not give a target. Compare it with what the same equity would earn elsewhere at the same risk, and look at the survival number first. Should you sell or refinance? A refinance keeps the building and raises the payment, so run the margin of collapse at today's rate. A sale ends the work and can trigger tax, so talk to your CPA first.

Then do the homework. Run both numbers on one property this week.

Return on equity is cash flow after the mortgage, divided by equity.

Margin of collapse is one minus the share of income after expenses that goes to mortgage payments.

Write them side by side. Return on equity tells you whether your equity is asleep. Margin of collapse tells you how carefully to wake it.

Where the Numbers Come From

Every market figure in this post was read from its source in the first week of October 2026. Markets move, so check the current release before you rely on any of them.

• Home prices: S&P Cotality Case Shiller national home price index, seasonally adjusted, February 2020 through July 2026.

• Mortgage holder equity: ICE Mortgage Monitor, August 2026.

• Rents and vacancy: Apartment List national rent report and city reports for Tampa, Brandon, Cleveland, and Jackson, September 2026.

• Stocks: Associated Press market summary for October 2, 2026. NYU Stern historical returns, 1928 to 2025. Yardeni Research bull and bear market tables. Shiller price to earnings data from multpl.com. The 12.8% for 2026 is the index alone. The long run figure includes dividends.

• Treasury yields: US Treasury daily par yield curve for October 2, 2026.

• Mortgage rates: Freddie Mac Primary Mortgage Market Survey, October 1, 2026.

• Fed policy: Federal Reserve record of changes to its target range.

• Inflation, jobs, and growth: Bureau of Labor Statistics consumer price index for August 2026 and employment report for September 2026. Bureau of Economic Analysis gross domestic product for the second quarter of 2026.

• Apartment buildings: RealPage on MSCI data for the second quarter of 2026. Northmarq rates and spreads for October 1, 2026. Trepp's September 2026 delinquency report, as reported by Yield PRO.

• Tampa Bay: Florida Realtors report for Hillsborough County, August 2026. Cushman & Wakefield Tampa Bay multifamily report, second quarter 2026. Florida Office of Insurance Regulation market overview. Bureau of Labor Statistics metro area unemployment for August 2026.

• City comparison: US Census Bureau QuickFacts for Tampa, Cleveland, and Jackson. Median home value and median gross rent come from the 2020 to 2024 survey. They describe different homes, so the rent share is a comparison between cities and not a return.

• Tax rules: IRS Publication 527, IRS Publication 925, and IRS guidance on the first year depreciation deduction under the 2025 tax law.

Further Reading

• REAP Principle 45: Score Every Asset on Time, Energy, and Income. The scorecard for deciding which buildings to finish, fix, or sell before you buy another one.

• REAP Principle 43: Understand the Power of Demographics. How to read who is arriving in a market and who is leaving before you underwrite a building there.

• The Tax Strategy Most Property Owners Overlook (And What You Might Be Leaving on the Table). Where the short lived parts of a building come from and how cost segregation speeds up the write off.

REAP meets every Saturday at 10 AM ET. It is a live real estate operations call for operators at any stage, from a first closing to running a full team. If this landed, run both numbers on one property this week and bring them to the next call. We will work through them together.

Join the community at alchemistnation.com.

Educational purposes only. Not an offer or solicitation. Nothing here is tax, legal, or financial advice.