Certified Apartment Portfolio Supervisor (CAPS) Practice Exam - Module 2

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Prepare for the Certified Apartment Portfolio Supervisor exam with our comprehensive quiz based on Module 2. Engage with multiple-choice questions and detailed explanations to help you enhance your knowledge and excel in your examination.

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What is meant by negative leverage?

Property produces higher cash flow than debt service
Investor profits and cash flow decrease
Increased value due to property appreciation
Increase in debt leading to higher income

The correct answer is: Investor profits and cash flow decrease

Negative leverage refers to a situation where the cost of borrowing (debt service) is higher than the rate of return generated by the investment (in this case, the property). When investors use negative leverage, their profits and cash flow decrease because the debt payments consume a significant portion of the income generated from the property. For instance, if an investor borrows money to purchase a property but the return on that property (after expenses) is less than the interest and principal payments on the loan, the investor ends up with less money than they would have if they had financed the property differently or not borrowed at all. This commonly occurs in environments where interest rates are high or property performance is underwhelming. This concept emphasizes the risk associated with using debt to finance property purchases, showing that while leveraging can enhance returns in favorable conditions, it can equally lead to reduced profitability and cash flow in unfavorable scenarios. Understanding negative leverage is essential for apartment portfolio supervisors to make informed decisions about financing and investment strategies.