Maybe we could use a worked example.

Frank buys a house for $125k, with 20% down ,$25k deposit, and a 30 yr mortgage for $100k at 5% fixed interest rate, standard amortization of principal. [ in year 1, that's $540 per month, comprising $410 in interest, and $130 in principal repayment. Property taxes at 1% are $1250 per year.

He decides to rent the house for a lease paying $2000 a month ( a shade over 1.5% within the 2% - 1% rule of thumb). Maintenance plus management fees are 500/ mnth, a total of $6000 a year. (Its a good investment).

So, pre- tax, what is the return on investment, and what is the return on equity?

I would propose the following ( lets assume simple averages for year 1):

ROI = Revenue - maintenance and fees - tax , divided by cost of the asset, $125k,

= $24,000 - 6000 - 1250 / 125,000

= 13.4%

But what is the return on equity?

ROE = Revenue - maintenance and fees - tax - interest, divided by net equity

= $24,000 - 6000 -1250 - 4920 / ($25,000 - 1560)

= 50%

and you gain 1560 in cashflow and as equity on the balance sheet.

Note the principal repayment served to reduce equity in the ROE equation, and is simply included in revenue inthe ROIequation.

The return you receive on the principal repayment is the same as the interest rate on the mortgage, 5% pretax.

above calcs are also, note, pre tax.