Many investors and even some advisors, are confused about the term gearing, and its subsequent application to investing.
Gears on bicycles exist to make riding easier by increasing power without the same increase in human effort. Likewise, levers increase lifting power without commensurate increases in human effort. The term ‘gearing’ in property simply refers to borrowing money to increase the amount of capital to invest, or to leverage so as to make purchases more feasible. There are three different types of gearing:
When a client borrows to invest, they have the capacity to compound returns and losses because the size of the investment is increased by the availability of borrowings.. For example, borrowing can mean that an investor’s initial capital of, $50,000, can potentially gain an exposure for that investor to five times that amount of capital growth. It can also mean that it can expose the investor to five times the degree of capital loss.
Let’s take a look at the numerous ways that gearing can apply to property.
Important: As previously mentioned in this course, as a property investment advisor, you are not qualified to provide borrowing advice. You can provide factual information to a client so they can better understand the concepts being discussed. At no point can you make comment or provide advice about that client’s particular finance and financial circumstances, unless qualified and licensed to do so.