California Real Estate Practice Exam

Borrowing against a property with a loan interest rate less than the "equity yield" on the property:

1. decreases equity yield.

2. enhances equity yield.

3. has no effect on equity yield.

4. is unlawful.

The correct answer is: decreases equity yield.

When borrowing against a property with a loan interest rate that is less than the "equity yield" on that property, the overall effect is to enhance the equity yield. By financing the property at a lower rate than what the equity is generating in returns, the investor is able to keep more of the profit generated by the property after servicing the debt. In this scenario, the net income received from the property exceeds what is required to pay off the loan interest, consequently increasing the overall return on equity. This enhancement in equity yield occurs because the difference between the income produced by the property and the cost of the loan interest ultimately increases the profits attributable to the equity investment. Hence, the correct answer should clarify that borrowing at a lower interest rate positively impacts the investor's equity yield.