Getting to grips with Geared Property
‘Gearing’ is essentially the use of borrowed capital (i.e. debt) to part fund a property purchase. It’s also known as ‘leveraging’, though many would refer to it as a mortgage. It’s attractive to many investors because it offers the opportunity to enhance returns; debt increases both risks and rewards.
The advantages and the risks of gearing
People use gearing two ways: in the form of a mortgage to purchase their own home (often because they don’t have the capacity for a 100%-equity purchase) or because they would like to enhance returns on an investment property.
The use of debt enhances returns by increasing the investor’s exposure to property price movements. If property prices rise, capital gains are increased, and if the market falls, the investor will see greater losses. Another risk of gearing is rising interest rates that reduce investors’ returns.
The graphs below show the effect on total returns for a sample property with 50% gearing, both in a growing market, and a declining market.
Note: Illustrative returns are based on our Drayton Heights block at launch, exclusive of the capital discount secured on purchase (which enhances returns further). All figures fully account for purchase costs, furnishings, forecast maintenance, annual voids, mortgage interest at 3.99%, corporate taxation and all fees
If you find the potential for enhanced returns attractive, with the bolstered security of multiple units, then why not explore some of the geared property investments we have available.