| 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):
• Mortgage Constant:
• Mortgage Rate:
• Mortgage Term:
• Equity Dividend:
• Equity Yield: