California Real Estate Practice Exam

A $2,000 down payment was made on a property, which was purchased for $20,000. The gross return on the purchase price was 9%. The only expense in the transaction was a 7% interest charge. The percentage return on this investment would be:

1. 11%

2. 13%

3. 27%

4. 8%

The correct answer is: 11%

To determine the percentage return on the investment, we need to analyze the gross return and the associated costs. The property in question was purchased for $20,000, with a gross return of 9%. This means the gross income generated by this property annually is calculated as: \[ \text{Gross Income} = 20,000 \times 0.09 = 1,800 \] Next, we examine the only expense mentioned, which is the interest charge. With a purchase price of $20,000 and a down payment of $2,000, the loan amount becomes: \[ \text{Loan Amount} = 20,000 - 2,000 = 18,000 \] An interest charge of 7% is then applied to this loan amount, resulting in annual interest expenses of: \[ \text{Interest Expense} = 18,000 \times 0.07 = 1,260 \] The net income from the investment is then calculated by subtracting the interest expense from the gross income: \[ \text{Net Income} = 1,800 - 1,260 = 540 \] Now, to find the percentage return on the cash investment, we compare the net income