California Real Estate Practice Exam

An investor who receives a 9% gross return on a property, and had a 9% interest expense, realized a net return of:

1. 0%

2. 5%

3. 9%

4. 11%

The correct answer is: 0%

When evaluating an investor's returns, it’s crucial to differentiate between gross returns and net returns. In this scenario, the investor is receiving a gross return of 9% on the property, which means that before any expenses, including interest, they are earning this percentage based on their investment. The investor also has a 9% interest expense on the financing of the property. This means that the cost of borrowing is effectively eating into the gross return. To determine the net return, you would subtract the interest expense from the gross return. In this case, both the gross return and the interest expense are equal at 9%. Therefore, when you subtract the interest expense from the gross return, the calculation looks like this: Net Return = Gross Return - Interest Expense Net Return = 9% - 9% = 0% This calculation indicates that after accounting for the cost of financing the property, the investor is left with a net return of zero percent. The combination of equal gross return and interest expense means that the investor isn't earning anything over what it costs to borrow funds, resulting in a net return of 0%.