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24 June, 06:47

Andrew bought a building at a 6% cap rate. The interest rate on his mortgage is only 5.2%. What will Andrew experience in the deal?

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  1. 24 June, 07:18
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    Positive leverage

    Explanation:

    In financial terms, leverage refers to using borrowed money to increase the return of an investment. In other words, a business gets a loan and invests that money in a project that hopefully generates a higher return than the borrowing costs.

    In this case, the mortgage rate is 5.2% while the cap rate is higher (6%), therefore if is profitable to borrow money and invest it ( = 6% - 5.2% = 0.8% positive leverage).
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