Return on Equity (ROE)

Return on equity is net income divided by the owner's equity, a measure of how hard the owner's capital is working. Rental investors apply it to annual cash flow over the equity they hold in a property. DSCR lenders care about coverage; investors watch ROE to decide whether to keep, refinance or sell.

On the $500,000 example, rent of $4,000 less a $3,330 payment leaves about $670 a month, or $8,040 a year, before repairs, vacancy and management. Against $125,000 of equity that is roughly 6.4% on those simplified figures.

As the loan pays down and the property appreciates, equity grows and ROE on the same cash flow falls. That is the usual trigger for a cash-out refinance: the new, larger loan lowers the ratio, and the lender's DSCR minimum caps how much equity can come out.

Further reading: Return on Equity (ROE) on Wikipedia.