Certified Apartment Portfolio Supervisor (CAPS) Practice Exam - Module 2

What does positive leverage refer to in real estate?

1. High debt leading to reduced returns

2. Property return exceeds the cost of borrowing

3. Ownership sharing among multiple investors

4. Tax benefits associated with ownership

The correct answer is: Property return exceeds the cost of borrowing

Positive leverage in real estate refers to a scenario in which the returns generated by an investment property exceed the costs associated with borrowing funds to finance that property. This means that the income produced by the property, whether from rent or appreciation, is greater than the interest and other costs incurred through the debt taken on to make the purchase. When investors utilize positive leverage, they can enhance their overall returns by using borrowed capital. The key element here is the differential between the return on the investment and the cost of the debt; a well-leveraged property can significantly increase an investor's equity and profitability. This can be particularly advantageous when market conditions are favorable and property values rise, leading to substantial gains while servicing lower-cost debt allows larger returns on equity. The other options do not accurately describe positive leverage. High debt leading to reduced returns would imply negative leverage, discounted ownership or sharing among investors pertains to partnership structures, and tax benefits associated with ownership relate to financial strategies rather than the concept of leverage itself.