Property investment: gearing and the equity rate of return

Abstract

Purpose

The purpose of this paper is to comment upon the relatively straightforward but often misunderstood role of gearing (or leverage) on the potential equity return of a property investment.

Design/methodology/approach

This education briefing is an explanation of the upside and downside risk of borrowing (at different levels) to successful investment.

Findings

The use of gearing can greatly enhance equity returns but at an increased risk.

Practical implications

The process of borrowing at a bank rate below the return rate on an investment project can increase the equity return of the project as long as all incomes and discount rate remain at appropriate levels.

Originality/value

This is a review of existing models.

Citation

French, N. (2019), "Property investment: gearing and the equity rate of return", Journal of Property Investment & Finance, Vol. 37 No. 3, pp. 323-328. https://doi.org/10.1108/JPIF-02-2019-0011