What is gearing, and why does it make property investment so attractive?

If you’ve been doing any kind of research into property as an investment, you’ll doubtless have come across the term “gearing” at one point or another. It’s widely regarded to be one of the main reasons property is such an attractive investment.

But what is gearing? And how does it actually work?

“To explain what gearing is,” says Bill Rawson, Chairman of the Rawson Property Group, “let’s first take a look at a conventional investment like a savings account. If you want to earn interest on R1000, you have to put R1000 into the account. Your money is the only money that is working for you. This applies to most investment types – but not to buying property.”

Rawson explains that the difference with property is that you can finance your investment at least partially through a bank, giving you access to an asset worth far more than you could afford on your own. In other words, to buy a house worth R1 million, you may only have to put down R100 000 in cash. Should that house increase in value over time, any profit on the sale (after paying back your loan) is yours. It’s a little bit like getting the interest on R10 000 in your savings account, even though you only put R1000 in. Why? Because it’s no longer just your money working to earn profits; gearing allows you to put the bank’s money to work for you as well.

“A recent example of a successful gearing investment,” Rawson elaborates, “can be seen at Rawson Developer’s “The Beaumont”, in Rondebosch. A buyer purchased a property off-plan – before the building’s construction started – for R1.5 million. He had to put down R150 000 as a deposit and he used R1.35 million of the bank’s money in the form of a mortgage bond. 18 months later, once the development was built, he sold the property for R2.5 million. The buyer had to pay a deposit, his credit for the 18 months, and a few related fees for things like attorneys. In return, he made upwards of R700 000 in profit.”

That is the essence of gearing – using other people’s money (or financing) to increase the size of an investment in order to increase the returns on your own capital outlay. Preferably without incurring too many additional costs to eat into your profit at the end of the day.

Speaking of costs, it’s important to acknowledge that gearing isn’t a guaranteed money-making machine.  “Borrowing money isn’t free,” Rawson points out, “and not every property will increase significantly in value over time, so it’s very important to investigate your costs and risk factors before committing to a purchase. Things like interest rates can impact on the profitability of gearing quite dramatically, as they directly affect the cost of property investments.”

According to Rawson, a great way to mitigate risk and decrease your costs is to use gearing to purchase an investment property with the intention of renting it out. “This not only gives you access to all the gearing benefits of a mortgage,” he says, “but it also allows the property to cover a portion (or all) of its own expenses.”

Ideally, the rental you charge on the property should be equal to or greater than your mortgage repayments. This can be difficult to achieve, however, and is not essential for the investment to be a profitable one.

Done right, gearing can be the leg-up you need to invest in a high-value asset and achieve high-value returns. It’s an opportunity limited almost exclusively to property, which is why property can be such a great investment choice.

It’s still important to invest wisely, so do your research into the property market before you buy. Contact your nearest Rawson Property Group franchise for expert advice on trends and opportunities near you.

  Comment on this Article

  Please login to post comments

Post to my facebook wall
Characters remaining

    Latest Property News
    • 19 Jan 2018
      Extending from Randfontein in the west to Roodepoort in the east and including the towns of Krugersdorp and Magaliesburg, the West Rand has a plethora of property available to residents who choose to make this unique area their home.
    • 19 Jan 2018
      When it comes to financial planning, doing the work to ensure you’re prepared for unexpected emergencies is just as important as ticking off your other goals and New Year’s resolutions. The beginning of the year is also the perfect time to review your various insurance policies.
    • 19 Jan 2018
      No surprises at the first Monetary Policy Committee of 2018, as Reserve Bank Governor, Lesetja Kganyago, announced that the interest rates would stay at their current levels.
    • 18 Jan 2018
      The Southern Suburbs make up some of the most popular residential areas in Cape Town, comprising charming groups of suburbs which lie to the south-east of the slopes of Table Mountain. It is seen as the city's most expensive residential neighbourhoods with a choice of various private schools, upmarket eateries, wine estates, beautiful homes and trendy apartments.
    • 18 Jan 2018
      New year, new goals! If you’ve resolved to purchase your first property in 2018, then this 6-step guide from the Rawson Property Group is a must-read. It will help you navigate and simplify what is often be seen as a confusing process of buying your first home – right from the house-hunt to the house-warming.
    • 17 Jan 2018
      While the current property market may still favour buyers, it doesn’t mean that they shouldn’t be well prepared before putting in an offer to purchase.
    • 17 Jan 2018
      Lightstone lists Blair Atholl as the most expensive suburb with an average house price of R11.2 million, followed by Westcliff (R10.5 million), Dunkeld (R9.3 million), Sandhurst (R9.1 million) and Inanda (R7.2 million).
    • 17 Jan 2018
      As it currently stands, there are four main ways in which a home can be bought in South Africa, says Adrian Goslett, Regional Director and CEO of RE/MAX of Southern Africa, who adds that deciding in which legal entity to purchase the property is not a decision that should be entered into lightly, as each has its pros and cons.
    Subscribe to the MyProperty Newsletter

    Last Name  
    Email Address  
    Email Frequency
    Share this Page

    For Sale Property
    Rental Property
    More Options
    Connect with us