How Gearing Makes a Difference

Written by Alan Findlay on . Posted in Investor Insight

‘Gearing’ is similar to the gear of a car – its main function is to make things work harder for you with less effort. In our case we are talking about investment and getting the money to work harder on your behalf.

Gearing is all about good debt. Gear too highly and some void periods or drops in rental can kill you but gear correctly and your cashflow will benefit. Here is an example:

Let’s say you buy a house for $50,000. The rent nets at $900 a month. You borrow 30% at 10% for 5 years. Monthly income would be $900 – $319 mortgage payments = $581.

After 5 years, your $35,000 investment would have $34,860 rent income and $50,000 of equity after loan is paid off = 142% return on your money.

Let’s compare that with gearing the same house at 50%. Your monthly income would reduce to $900-$531 = $369, and after 5 years you would have $22,140 plus the $50,000 equity – while this is less than the first example, the investment was only 50% ($25,000) rather than 70% ($35,000) so the return on the $25,000 is $77,140 – same house, same rent, higher gearing – 208% return.

So in short – gearing higher means you employ relatively less capital, increasing your overall return.

Note that these examples do not involve any capital growth. One scenario that could illustrate how gearing can go wrong, would be when someone buys ‘for growth’ with a low yield, and high gearing (banks will sometimes still lend this way). For example, if I buy an apartment in London for $500,000 and get 70% lending at 5% interest for 30 years the net rent could be $2500 a month (6% NET yield) but the monthly mortgage payment would be $2201. In a no capital growth scenario, the investor is only getting cashflow of $3,588 a year from his $150,000 investment – at 2.39% less than a bank will give. However, the main danger of this is the risk to the cashflow. If the loan is variable (common in UK and interest rates rise (likely)), or if rents drop, then the excess cashflow totally disappears and you find yourself with a negative cashflow hole every month to cover.

In conclusion – look for the ‘sweet spot’ in gearing – where your cashflow is not at risk but use the banks money to maximise your own returns.

Photo: Flickr

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Successful Real Estate Investing 3 – Focus On Cashflow

Written by Alan Findlay on . Posted in Investor Insight

In the past, there was a received wisdom (usually among agents selling overpriced ‘investments’ for high commissions) to ‘invest for capital growth’ – i.e. don’t worry so much about what the Yield is, just buy where you think is an ‘up and coming area’ or ‘the next big thing’ – these in Europe were places like Capital cities in Eastern Europe (Tallinn, Riga, Sofia, Prague, Budapest) and Holiday destination such as Spain, and in USA places like Las Vegas or Florida. It’s no coincidence that these are the places now hit hardest in the real estate bust , and has taught a sharp lesson to ‘growth investors’ . Fortunately with the advent of the writings of Robert T Kiyosaki (Rich Dad Poor Dad) and his less famous predecessor Dr William G Hill (Think Like a Tycoon) which gave the same message, there are a growing number of investors who use cashflow as their first ‘box’ to tick when looking for a real estate investment.

When looking at the object to buy – the most important thing and the first calculation to make is to check that the deal is ‘cashflow positive’ This means no matter how the market goes, you are making money regularly. The basic calculation will be to work out the difference between rent money in, and money out –lets say for example, you buy a foreclosed Investment Property – an apartment in a complex, in Florida, for $100,000 (sold for $200,000 in 2007). If the monthly rent is $800, the annual rent is $9,600 (gross yield 9.6%) and the service charge is $340 per month (service charges are relatively high here due to pool maintenance and other facilities), the mortgage interest (75% at 3.95% interest rate) is $247, there are $50 more of outgoings, and so the monthly income ($800) minus the monthly outgoings ($340 + $247 +$50) = $163 per month positive cashflow.

However, there are in addition some risk factors worth adding in to make sure the deal is worth it:

1. Vacancies – every year or two there is likely to be some empty time – Calculate in for one month every two years there or one month every year if it’s in a harder to let area (and ask yourself why are you buying in a ‘hard to let’ area?!) Assuming this foreclosure is in an easily letting area with a good tenant pool, then there’s $33 a month to take off the income to cover the potential for vacancy.

2. Mortage Amortisation – currently it’s likely that you’ll be asked to amortise your loan – with the above example, (check our mortgage calculator here) the loan amortised over 15 years will mean the repayment is $553 per month.

As you can see, the above extra checklists will put this ‘bargain’ into negative cashflow territory – $800 – $553 – $340 – $50 – $33 = minus $176 so what on the surface looked like a good cashflow deal, became a ‘growth play’, and isn’t a good investment from the start.
Looking at another example – lets take 63 Simon, Buffalo, on our front page – Rent in per month is $950. Monthly costs are $248, mortgage including amortisation is $330, and let’s take a vacancy of say one month per year to be safe – 950/12 = $80 per month, so there is $950 – $248 – $330 – $80 = $292 positive monthly cashflow.

This is fundamentally important – in every real estate investment you make, every month from day 1 you should be making money.

In Summary

1. Only buy deals with positive cashflow from day 1.

2. Make sure the investment has a good sized pool of potential tenants – i.e. take this into account when selecting 1. Unit size and 2. Area

3. Take into account ALL costs and deductions, not just the patently obvious ones, and assume a conservative scenario at all times.

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What To Do With £50,000?

Written by Alan Findlay on . Posted in Investor Insight

What should you do if you have £50,000 in the bank and don’t know where to invest? Below are some examples of the returns to expect over 5 years. Investing your money in the bank will get maximum 27.6%, in UK real Estate 38%, with high yield real estate via Abbotsinch 79.3%. This demonstates that in a flat/recessionary market, yield is the most important factor if you want to maximise returns.

Bank Account

Typical Bank Accounts in UK will yield an interest rate of under 5%. Lets imagine you do get 5%. Your money will grow as follows:

End Yr 1 – £52,500
End yr3 – £57,881
End yr 5 – £63,814 or 27.6% over 5 years

UK Real Estate

The Real Estate Market has fallen back sharply in some areas – However lets consider that you can get a buy to let mortgage of 70% LTV fixed for 5 years at 5%, and also a decent 6% net yield, and the market remains stable over the period. With £50,000 down you could expect closing costs of £5,000 including stamp duty and legal fees, and the mortgage app. Fee. However you could possibly then buy with the £45,000 a property at £150,000, with a net £9,000 a year income after repairs, service charges etc. The mortage interest payments would be 5000 a year so a steady £4,000 a year income would be yours.

End Yr 1 – £49,000
End yr 3 – £59,000
End yr 5 – £69,000 or 38% return over 5 years.

Investing Via Abbotsinch

50,000 pounds will translate currently (say at 145 exchange rate) as $72,500. With closing cost of $2500 you could buy a single unit ($25,000) and two double units ($35,000 each) with 30% loan at 10% interest rate. Typical net yields will average at 15%. This would equate to net income of $15000 per annum minus loan interest of $3000, ie $12,000 per annum.

End Yr 1 – $82,000
End yr 3 -$106,000
End yr 5 – $130,000 ie 79.31% return over 5 years.

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Successful Real Estate Investing 2 – Keep an Eye on Your Yield

Written by Alan Findlay on . Posted in Investor Insight

Yield can be calculated as Gross Yield or Net Yield – it is used both as a rough comparison on cashflow between competing investments and as an indicator of what income you should be expecting. Gross yield for example, is calculated by taking the annual rent on a property, and dividing that by the value of the property. I.e. if you were to buy a typical double unit house through Abbotsinch Capital, ( let’s say one on the sites front page, 119 Rounds ) the Gross rent would be $850 x 12 = $10,200 and the purchase price is $36,850 so the Gross Yield is $10,200/$36,850 = 27.7% (rounded to 28% in the brochure) Typically but not always, higher yields reflect perceived risk, and perceived security of returns – i.e. in theory the lowest yields in the world would be found in the safest investments.

In practice, this is a very imperfect market, partly due to the illiquid nature of real estate, and partly due to the fact that perfect information is rarely available in any market. The lowest yields are typically to be found in investments like Gilts (Government Bonds) of developed and rich countries (for example Switzerland) or you could say in easy access bank accounts (the returns are lower because of the liquidity) Moving up the yield curve, high end real estate, Blue chip equities for example will nowadays produce a yield of 3-6%, with the perceived reflected risk that these are quite ‘safe’ investments. Yields in high end real estate were as low as 1 or 2% in the boom times, (for example Grafton Street in Dublin) reflecting perceived ‘very low risk’ – and as the market corrected the prices and the rents fell accordingly, wiping out the fortunes of these ‘safe haven ‘ investors as they went.

The higher yields in investments can be one of or a combination of two things – it can either mean that the price of the investment is too low (i.e. its ‘undiscovered’) or its perceived as a risky investment (i.e. emerging market yields were traditionally higher than for example in US or Western Europe, until the boom came in these countries and temporarily put yields lower in Riga than in Vienna for example) yield. Now 10 years later the area has fully gentrified, and therefore not only have rents risen substantially, and tenant quality improved, but the prices have more than doubled, and therefore yields have halved to 7%, reflecting a more ‘safe’ investment (i.e. AFTER all the money has been made!!)

An example of this could be in 119 Rounds, Kensington, Buffalo – the average house price in Rounds Street according to is around $50,000, assuming we are renting for market rent (the houses on this street are all very similar size), giving an average gross yield of20 %. This would say that 119 Rounds has a lower than market price and therefore a high yield, compared even to its neighbours. If for example, however, the price of the house increased towards the average local price (say $50,000) then the yield would fall to 20% and the investor would have made $14,000 or 38% in capital growth over the period. This then illustrates an inbuilt ‘equity gain’ that can be taken into account when the yield is so high. However, not all areas will have the potential for so much equity gain, and this is reflected in the extremely high yields of some of the houses, where the areas are currently disreputable and deemed as ‘ghettos’ and therefore have limited capital growth potential. The high yields here (for example in 11 Moeller) reflect the risk of limited potential upside in long term capital growth.

In summary

1. Look to buy high yield that is more valued as ‘undiscovered’ rather than valued as ‘risky’

2. Yield is a more secure income reflector than capital growth, especially in a recession/depression.

3. Ultra high yields can be seen as moving towards speculative investments – i.e. over 40% typically (but not always) will mean that there are some issues with the area (i.e. it may be an ungentrifiable ‘ghetto’ or in a neighbourhood with bad demographics, or with substantial repairs required. However this said, this type of investment can be very profitable and does have a place as part of a larger portfolio.

<< Back to US Property Investor Insight Newsletter July 2010

Why Invest In USA? Why ‘Rust Belt’ Cities?

Written by Alan Findlay on . Posted in Investor Insight

USA has the largest real estate market in the English speaking world. It also is one of the most diverse.There are arguments on both sides for investing in US assets but events are beginning to show that the US$ is behaving as a ‘haven’ currency, retaining and even strengthening against the British Pound and Euro and is perceived as having more internal stability, within a more dynamic economy.  However within the country, investing successfully depends on a number of factors taken together as a whole, and different locations have been affected in very different ways throughout the USA.

‘Rust belt’ cities in the NE area of US such as Rochester, Syracuse, Buffalo, Detroit, and Indianapolis have been in the unusual position of missing the real estate boom, and missing the downturn. As a result, a large number of attractive properties can be purchased for ‘yesterdays’ prices – relatively low cost (typically $20,000 – $40,000) and extremely strong cashflow (typical Gross yield 25-35%). Gearing of up to 60% can be obtained on these properties and there while the focus on these units is income, there always remains the potential ‘bonus’ of capital growth. The Gross yields in these cities are some of the highest in the world, and this largely negates the income/debt servicing risk that ‘normal’ real estate is exposed to. For example, if a typical gross yield for foreclosed residential property in Florida, California or Nevada is 8%, then if there is a prolonged vacancy period or a drop in market rents due to large numbers of foreclosures in the area (flooding the market with rental properties), or a rise in interest rates, then there is a real chance of negative cashflow, which negates the reasons for buying the real estate in the first place.

Tangible commodities such as high income government backed real estate can provide a strong and safe cashflow while protecting against the future risks of both deflation and inflation.

In summary

– We believe US$ Assets are more likely to hold their value than Euro or pound in the medium term.

– Locations within USA with Strong cashflow, and a high number of private renters and government backed tenants are more attractive than ‘normal areas’ in the current economic climate, where the tenant market is often limited, and immature, and yields too low to make an attractive investment.

– Steady cashflow is a much more secure way to make a return on investment than hoping for capital growth, which may or may not happen.

<< Back to US Property Investor Insight June 2010

Successful Real Estate Investing I – Do Your Research

Written by Alan Findlay on . Posted in Investor Insight

Any successful real estate investor will tell you that the most important work is done BEFORE the investment is made. Saying NO to an investment is one thing that separates successful investors from failures. One easy way to do this is to simplify the process down to a checklist of investment boxes to be ticked and if the deal stacks up, all the boxes will be ticked. Here is an example checklist that can be used when looking at a new deal.


Is the investment in a location where there is constant rental demand? Buffalo, for example, has approximately 30% owner occupiers, making the majority of the population tenants. This ratio ensures constant demand for your property, although it pays to look for areas with a mix of owners, who look after their homes, ensuring kerb appeal. Other location related factors like the local economy, demographics, new transport links, local house price and rental trends should be taken into account too. Finally here, look at the neighbouring houses and their condition – getting good tenants will be affected by the general feel of the street. If you cannot physically see the street, look at Google Streeview.


Do you have a reputable letting and management team in place? Bad management, especially efficient rent collection, tenant vetting and speedy repairs can make all the difference and can save a lot more than the fee in the long run. Make sure the team you have in place are easily contactable, well established locally, and a member of the local letting agent professional body if there is one. Ask for references from existing clients, and check out internet forums for any negative posts on the company.


Letting a property in good condition and keeping it well maintained at all times will attract a much better quality of tenant, and will always pay for itself in the long run. Make sure to make speedy repairs if there are any issues coming up. You will also get a good reputation as a landlord which helps, especially if you build a larger portfolio.


Contrary to conventional ‘wisdom’ in recent years, there’s little point in buying a real estate investment that doesn’t provide long term positive cash flow. This means it should be providing an income every month, on top of the added potential ‘bonus’ of capital growth.

If you have chosen an investment wisely with a strong steady cash flow, then gearing can be your friend. Gearing is normally in the form of a bank loan or vendor finance. Check the worked examples section to see how gearing can vastly improve your Return on Investment (ROI) by lowering the amount you invest but retaining a proportionately higher amount of the income.

<< Back to US Property Investor Insight  June 2010


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