Also look up leverage. I'll explain: Suppose Sharp Elbows Corporation owns Funky Cribs apartment complex that cost $5 million, and they owe $4 million to First National Bank of Greed, and they pay FNBG 6% annual interest on the loan.
Sharp Elbows Corp. has $1 million in equity.
Suppose that Sharp Elbows collects a Million Dollars in Rent from Funky Cribs.
Half of that rent goes for the expense of operating the apartments, paying for repairs, lawn mowing, snow removal, and security to evict the meth addicts and crack heads.
Sharp Elbows Gross Profit is $500,000 out of which they pay FNBG $300,000 in interest. Sharp Elbows Corp. owners profit is $200,000 which is a 20% return on its equity of one million.
If Sharp had not used leverage, but had put up the full $5 million to buy Funky Cribs they would have not paid interest, kept half a mill, but they would only have made 10% on their money.
If Sharp has $5 million to invest this way, they can make twice as much by leveraging five complexes like Funky Cribs, than if they simply paid cash for just the one funky apartment complex.
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