“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).
