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Gearing is simply borrowing money
to buy an investment that is bigger than you could otherwise
afford.
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» gearing allows you to buy
more property ...
Assuming that the property you are buying and borrowing
against will grow in value over time, gearing allows you to
buy more property that you could out of your own cash
resources. This means you get the benefit of the capital
appreciation of a bigger asset than you could have bought from
your cash funds. It may also mean a smaller cash return from
the rent as some cash is used to cover borrowings.
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Gearing allows
you to buy more property than you could out of your own cash
resources.
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» gearing allows you to build
up your property portfolio ...
Gearing allows you to build up your property portfolio much
faster than you would otherwise be able to.
Provided all goes well you can use the capital growth in your
properties as a means of continuing to add to your portfolio
over time. There are many people who after they have bought a
property, use the rent first to pay interest and second to
reduce borrowings. This, along with capital growth that occurs
over time, can dramatically lower your gearing levels.
(See
Example on Gearing.)
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Gearing allows you to build up your property portfolio much
faster.
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» gearing is beneficial, but
also carry risks ...
Although gearing is beneficial to building your property
portfolio, it also carries risks. Having a high proportion of
borrowing means that you depend absolutely on rental flow to
pay the interest, thus a period of no rent could spell trouble
for your investments.
In a falling market, when rent stops and you are highly
geared, you not only do not have cash flow to cover your
interest payments, the lack of income also reduces the value
of the property. This often leaves you scrambling to find a
tenant, and due to your difficult financial position you are
in a weak negotiation position. You may end up leasing your
property to a lesser-quality tenant, perhaps at a lower rental
and with less favourable lease terms.
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Excessive gearing carries risks, especially in a falling market.
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» a comfortable level of gearing ...
All said, nearly all property investors borrow to buy
property. What you need to decide is the level of gearing that
you are comfortable with.
It is common for property investors
to gear up their property by 60 to 70% of purchase price.
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Property investors
usually gear up their property by 60 to 70% of purchase price.
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