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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Dragster

Business

5 December, 06:54

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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Answers (1)

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Aisha · Answer 1

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).