negative carry

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Negative carry

Negative Carry

A situation in which an investment has a lower yield than the cost of funding for it. For example, an investor may borrow money at 6% interest to invest in a restaurant with only a 4% yield. In this case, the investor has a negative carry of 2% and is actually spending money to invest in the restaurant. One may think of a negative carry as a bad investment, but it sometimes results in a net profit if the interest on the cost of funding is tax deductible and the investment itself is a tax free security, such as a municipal bond.

negative carry

The net cost of an investment position when the investment's cost of carry exceeds its current income. For example, buying a bond with a current yield of 10% and financing the purchase with money borrowed at 13% will result in a negative carry. Compare positive carry. See also carrying charges.

Wall Street Words: An A to Z Guide to Investment Terms for Today's Investor by David L. Scott. Copyright © 2003 by Houghton Mifflin Company. Published by Houghton Mifflin Company. All rights reserved. All rights reserved.

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Goldstein says not paying the mortgage was typical when the market was bad because the boards felt the banks could not do anything with the units anyway, as most in the early 1990's had negative carries. But as the rental market has boomed, the lenders have seen the properties would be more valuable.

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"It was only when it became painfully obvious the market wasn't shifting, for self preservation, we had to rent them because there were terrible negative carries," he said.

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