Tom takes a loan of $60,000 at 4% annual interest to purchase a property worth $100,000. He earns an annual income of $10,000 after expenses but before interest and income taxes are deducted. If the income tax rate is 30%, then the leveraged return on the real estate investment is:

Question

Quizplus · Accepted Answer

The leveraged return on investment (ROI) can be calculated by considering the net income after interest and taxes, divided by the investor's initial equity. Here, Tom's annual interest expense is 4% of $60,000 = $2,400. His income after interest is $10,000 - $2,400 = $7,600. The income tax is 30% of $7,600 = $2,280. Thus, his net income is $7,600 - $2,280 = $5,320. Tom's initial equity is the property value minus the loan amount, which is $100,000 - $60,000 = $40,000. The leveraged return on investment is ($5,320 / $40,000) * 100% = 13.3%, rounded to 13%.

Tom Takes a Loan of $60,000 at 4% Annual Interest