Example

You are considering a potential investment with a CFAT of $17,553 and a $23,974 equity buildup the first year. The investment required is $130,417. What's the equity return rate?

It's 31.8%.

A Ratio Too High ?

When you add the equity buildup to the after-tax cash flow, it makes this rate of return potentially the highest (particularly in times of steep real estate appreciation). Those who desire to show a large yield use this rate of return.

Equity buildup can include both the increase in equity due to the reduction of principal as the loan is paid and the increase due to the appreciated value of the property.

Although this rate of return takes into account additional data, it is only calculated for the first year and is only a partial picture of the investment performance. It does not consider the affect of income taxation (upon sale) on equity build-up, and the cost of sale is also ignored.

Formula:   (CFAT + Equity Buildup) ÷ Equity

Explanation

When you add the equity buildup to the after-tax cash flow, it makes this rate of return potentially the highest (particularly in times of real estate appreciation). Those who desire to show a large yield use this rate of return.

Equity buildup can include both the increase in equity due to the reduction of principal as the loan is paid and the increase due to the appreciated value of the property. Although the equity return rate takes into account additional data, you calculate it for only the first year, and therefore it is only a partial picture of the investment performance. It does not consider the effect of income taxation (on sale) on equity buildup, and it ignores the cost of sale too.