California Real Estate Practice Exam

An investor put $10,000 down on a property purchased for $100,000. He received a 9% gross return on the purchase price and had a 9% interest expense on the loan amount as his only expense. What was the percentage return on his investment?

1. 0%

2. 11%

3. 9%

4. None of the above

The correct answer is: 0%

To determine the percentage return on the investor's investment, we first need to break down the financials involved in this scenario. The investor purchased a property for $100,000 and made a down payment of $10,000, financing the remaining $90,000 through a loan. The investor received a 9% gross return on the purchase price, which amounts to: \[ 9\% \text{ of } \$100,000 = \$9,000.\] The interest expense on the loan amount of $90,000 is also 9%, calculated as follows: \[ 9\% \text{ of } \$90,000 = \$8,100.\] Now, to find the net income generated from the investment, subtract the interest expense from the gross return: \[ \$9,000 - \$8,100 = \$900.\] Next, to find the return on investment percentage, divide the net income by the initial investment (the down payment): \[ \text{Return on Investment} = \frac{\$900}{\$10,000} = 0.09 \text{ or } 9\%.\] It’s important to note this calculation aligns with the gross return but does not reflect an