In: Finance
Which example best describes use of positive leverage?
Purchasing a $1,000,000 investment property using both equity of 250K and loan of 750K, then earning a 25% return on equity. |
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Purchasing four 250K investment properties using only equity, then earning a 30% return on equity. |
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Purchasing a $1,000,000 investment property using both equity of 250K and loan of 750K, then earning a 10% return on equity. |
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Purchasing a $1,000,000 investment property using own equity, then earning a 10% return on equity. |
The correct answer is the first one. Positive leverage is when you borrow at a lower rate and earn higher rate from the investment. So when they invested 750K of loan and earned a higher rate of 25%, so that is positive leverage.