A client has $100,000 to invest and is considering two options: 1) Buying a $100,000 rental property with cash, or 2) Using the $100,000 as a 20% down payment on a $500,000 rental property. Assuming both properties appreciate by 10% in the first year, which statement accurately describes the return on their initial cash investment, ignoring expenses and loan payments for simplicity?
-
A
The cash purchase yields a 10% return, while the leveraged purchase yields a 50% return.
-
B
Both investment options yield an identical 10% return on the cash invested.
-
C
The leveraged purchase yields a 10% return on the property's value, which is $50,000.
-
D
The cash purchase is superior because it avoids interest payments and has no leverage risk.