________ is a position in which, if a property's return below its debt cost, the investor's return will be less than from an all-cash real estate deal.
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A. B. C. D.A
Remember that, in real estate, the use of debt financing to purchase a piece of property will affect its risk-return parameters.
The correct answer to the question is A. Negative leverage.
Leverage refers to the use of borrowed funds to finance an investment. In the context of real estate, leverage typically involves using debt (such as a mortgage) to purchase a property instead of paying for it entirely with cash. The cost of debt is the interest rate or other financing costs associated with the borrowed funds.
In a real estate investment, the return generated from the property can be influenced by the use of leverage. If the property's return is higher than the cost of the debt, the investor can benefit from positive leverage, as the return on the investment will be higher than if they had purchased the property with all cash. This occurs because the investor is only required to put down a portion of the property's purchase price as a down payment and borrows the remaining funds at a cost.
However, if the property's return falls below the cost of the debt, the investor will experience negative leverage. In this situation, the return on the investment will be lower than if the investor had chosen to purchase the property with all cash. This happens because the investor is still obligated to make interest payments on the borrowed funds, even though the property's return is not sufficient to cover those costs.
Therefore, negative leverage refers to a position where the property's return is lower than the debt cost, resulting in the investor's return being lower than if they had pursued an all-cash real estate deal. This situation highlights the risk of using leverage in real estate investments, as it amplifies both gains and losses.
The other answer choices are not correct:
B. Positive leverage: This answer choice refers to a situation where the property's return exceeds the cost of the debt, resulting in a higher return for the investor compared to an all-cash deal. It is the opposite of negative leverage and is not the correct answer in this case.
C. Excess financing: This term does not accurately describe the situation described in the question. Excess financing typically refers to borrowing more funds than necessary for a particular investment or purpose, which is not directly related to the return on the property or the cost of debt.
D. None of these answers: This answer choice is incorrect because there is a specific term, "negative leverage," that accurately describes the position where the property's return is lower than the debt cost, resulting in a lower return for the investor compared to an all-cash deal.