How to fund an investment property?
One of the attractions of residential property investment is that by taking out a mortgage or gearing, the investor can acquire a property asset with a value far in excess of the cash amount of money they may have at their disposal.
What is gearing?
Gearing is a technical financial term, but is simple to understand and has a radical effect on the performance of your investment. Property is the only investment where gearing is possible.
When you use gearing, you essentially use someone else’s money (a mortgage) to finance a proportion of the investment, but keep the capital gains yourself.
How gearing works?
An investor has €50,000 in cash. By using the concept of gearing they take out an 80% mortgage (€250,000) and purchase a property for €250,000. If the property increases in value by 10%, in 12 months it will be worth €275,000. The investors initial €50,000 has now grown to €75,000.
The attraction of gearing is that the investor gains from the capital increase on not only their own proportion of the purchase money but also the mortgage finance.
Obviously there are no guarantees of market growth particularly in the current market climate. In the more buoyant market of recent years investors used gearing and the growth in property values to release equity from existing properties to buy additional properties and grow their portfolio.