Finance
What is 'yield' in real estate investment and how is it calculated?
AThe total dollar profit from a real estate sale
BThe return on investment expressed as a percentage — annual income divided by the investment amount; different from cap rate in that it can include appreciation and leverage effects✓ Correct
CThe gross rent divided by the purchase price
DThe interest rate paid on the mortgage loan
Explanation
Yield in real estate is the return on investment, typically expressed as a percentage of the investment. It can be calculated various ways: cap rate (NOI/price), cash-on-cash return (cash flow/equity invested), or total return (income + appreciation).
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Key Terms to Know
Capitalization Rate (Cap Rate)
A rate used to estimate the value of income-producing property, calculated as Net Operating Income divided by property value.
Net Operating Income (NOI)The annual income generated by an income-producing property after subtracting operating expenses, but before debt service.
Loan-to-Value Ratio (LTV)The ratio of a mortgage loan amount to the appraised value or purchase price of a property, expressed as a percentage.
Discount PointsPrepaid interest paid to a lender at closing to reduce the mortgage interest rate, with each point equal to 1% of the loan amount.
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