Living La Vida Local
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past decade, that property has gone up in value 4x, and it now worth a cool $2,000,000. The amount of the loan has dropped to $250,000, making your current equity in the property $1,750,000. Cash flow has grown to $50,000 annually. As a passive investor, you are delighted, you are making a 20% yield on your original investment. An active investor you divide the $50,000 net income by the $1,750,000 in equity and realize that your current cash-on-cash return is 3%. Appreciation has shrunk the yield on your investment.

“Some people are content to acquire and hold property,” states Norris. “More aggressive investors are constantly turning over properties to maximize the yield on their investments.

What is the financial difference between active and passive investing? By reinvesting the $1,750,000 to earn an 8% yield, as the investor was receiving on their original equity, their current cash flow would be $140,000 - $90,000 more than the $50,000 annual cash flow the investment property is currently earning.

“That is why aggressive investors will continue to buy and sell properties, to create higher yields,” notes Norris.

If you are interested in active real estate investing, here are some terms that will be of use to you:

   • Holding Period:

     The length of time the typical investor expects to hold the property.

   • LTV (Loan to Value Ratio):
     This represents the loan or debt portion of the property investment in terms of a percentage.

   • Mortgage Constant:
     Mortgage constant is a rate that reflects the periodic annual payment of principle and interest on a mortgage with a level
      amortization schedule that will extinguish the debt.

   • Mortgage Rate:
     Mortgage Rate is the annual interest rate lenders charge when making real estate loans.

   • Mortgage Term:
     Mortgage term is the number of years for which the mortgage was given.

   • Equity Dividend:
     The "cash on cash" return (usually reflecting the first year) that measures the portion of income remaining after satisfying all      expenses including mortgage debt to the initial down payment.

   • Equity Yield:
     The annualized total return an investor would desire from the property (required rate of return on and of equity capital).