Real Estate Investor Magazine South Africa September 2013 | Page 28

FINANCE

BY KOOS DU TOIT

Avoid Gearing Gaffes
Don’t gear beyond your affordability

interest rate (the long-term average) before buying
a property.

Gearing beyond value

Negative gearing

M

any investors, realising the power of
gearing (borrowing money to invest in
an asset) and the spectacular returns
that it delivers, step into a common, but entirely
avoidable, pitfall: gearing beyond their affordability
or beyond the security offered by the asset.

What is gearing?
Gearing, or leveraging, is also referred to as using
“Other People’s Money” (OPM) in wealth creation
circles. Essentially, it simply means borrowing
money to invest in an asset, such as using a
mortgage loan to acquire a buy-to-let property.
If you are acquiring a property for R500 000,
and obtain a mortgage bond for R500 000, that is
100% gearing of the investment. Recently, it is far
more likely that the mortgage lenders will require a
deposit. If a 10% deposit is required, the result is a
90% gearing of the investment, while a 20% deposit
requirement will result in 80% gearing.
While gearing is a powerful force in creating
wealth, exponentially increasing the returns on
investment, responsible gearing is absolutely
crucial to property investment success. Gearing
beyond your affordability can result in serious
cash flow problems, while gearing beyond the
security offered by the value of the property can be
a shortcut to disaster.

26

September 2013 SA Real Estate Investor

Negative gearing refers to the
very common situation in which
an investor acquire a buy-tolet property using gearing, ie a
mortgage loan, but the income
produced by the property (in the
form of rental income) is less than
the total monthly expenses (bond
repayments, rates and taxes, management
fees, etc) which means that the investor must
fund the shortfall between the rental income
and the total expenses from his/her own pocket
each month.
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