Gearing
Gearing is a concept used in cases where the buyer uses his or her money to purchase property with a greater value then he or she has at their disposal.
The following illustration is a basic example showing why gearing is so effective in property investment.
Investment via a bank account for a period of 12 months with 5% interest rate.
£12,000 X 5% = £12,600
£600 Gross Profit
Investment via property for a period of 12 months
Capital growth of 5% of £120,000 (NOT £12,000)
£12,000 = 10% Deposit for £120,000 house
£120,000 X 5% = £126,000
£6,000 Gross Profit
The following example outlines the reasoning behind investing monies across several properties as opposed to a single property investment.
Investing £100,000 cash in one property for a period of 12 months .
The net yield of 4% achieved by renting x £100,000 = £4,000
Profit = £4,000
Capital growth of 5% of £100,000 = £5,000
A return of £9,000 on your investment
Investing £100,000 across multiple properties for a period of 12 months
£15,000 deposit across 6 properties with a value of £100,000 each
The yield of 4% achieved by renting X £600,000 (6X£100,000) = £24,000
Profit = £24,000
Capital growth of 5% of £600,000 = £30,000
A return of £54,000 on your investment