According to the facts below, the leveraged rate of return, in this case, comes out to 18.71%.
It is the investment return made with borrowed funds. Y is the asset return, R is the cost of borrowing money, and N is the "haircut," or the portion of the money the investor must put down as collateral for the loan, in the calculation for the leveraged return, L.
When anything is described as "highly leveraged," it suggests that there is more debt than equity in the business, asset, or investment.
Leveraged return = [ROI – (1 – Equity) × Cost of debt] / Equity
= [10% - (1 – 20%) × 7.82%] / 20%
= [10% - 6.26%] / 20%
= 18.71%
ROI = NOI / Property Value
= 100,000 / 1,000,000
= 10%
Cost of debt = Annual Payment / Loan
= 62,581 / 800,000
= 7.82%
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