Question
John McCoy has decided to invest in rental properties. He has $100,000 of his own money to invest. He is considering two options, either pay
John McCoy has decided to invest in rental properties. He has $100,000 of his own money to invest. He is considering two options, either pay all cash with his own funds or borrow 80% of the purchase price. Assume each house he buys has a cost of $100,000 and is expected to generate $8,000 in rental income each year. Ignore any interest expense and assume the $8,000 rental income is his net after-tax gain.
If John uses borrowed funds and invests his total personal funds, how many houses can he buy and what is his ROE?
A. One house, ROE = 40% B. One house, ROE = 10% C. One house, ROE = 8% D. Five houses, ROE = 10% E. Five houses, ROE = 40%
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