The use of financial leverage when investing in real estate is a double-edged sword. While increased leverage may allow the investor to "purchase" higher expected returns, the "price" of doing so is an increase in which of the following risks?
A) Liquidity risk
B) Default risk
C) Interest rate risk
D) Pipeline risk

Question

Quizplus · Accepted Answer

Financial leverage involves borrowing money to invest in a property, therefore, increasing the amount of debt in the investor's portfolio. This, in turn, raises the default risk since the investor is now more likely to default on their loans if the investment does not generate sufficient returns. The other options, liquidity risk, interest rate risk, and pipeline risk are also real estate investment risks but are not directly caused by financial leverage.

The Use of Financial Leverage When Investing in Real Estate