Question: That famous real estate investor, Bob, has $1,000,000 of his own equity capital available to make a real estate investment. He finds a bargain, a property with a market value of $1,100,000 that he can buy for $1,000,000.
a. By how much can Bob enhance his net wealth by leveraging his purchase of this bargain property using borrowed money to finance at least part of his investment?
b. Now suppose the bargain property is twice as large, worth $2,200,000, and Bob can buy it for $2,000,000, but he still has only $1,000,000 of his own capital available. In these circumstances, how much more can Bob increase his net wealth by using leverage, assuming he could borrow at least up to a 50% LTV ratio?