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

Why might an investor opt for a mortgage when financing real estate?

1. To reduce their total debt

2. To eliminate the need for down payment

3. To acquire additional funds while benefiting from tax advantages like mortgage interest and depreciation

4. To avoid interest payments altogether

The correct answer is: To acquire additional funds while benefiting from tax advantages like mortgage interest and depreciation

Opting for a mortgage when financing real estate can provide the investor with additional funds while allowing them to benefit from various tax advantages, such as the mortgage interest deduction and depreciation. Mortgages enable investors to leverage their capital; they can purchase a property that might be beyond their cash purchasing ability, thereby potentially increasing their return on investment. Tax benefits are significant in real estate financing. The interest paid on a mortgage can often be deducted from taxable income, decreasing the investor’s overall tax liability. Furthermore, depreciation allows the investor to account for the wear and tear on the property over time, further reducing taxable income. This strategy is vital for many real estate investors who aim to maximize their capital growth and minimize tax burdens. By using a mortgage wisely, they can manage cash flow while still progressively building their portfolio.