Question

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?

Answer 1

Answer:

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).