‘Gearing’ is essentially the use of borrowed capital (i.e. debt) to part fund a property purchase. It’s also known as ‘leveraging’, though many would refer to it as a mortgage. It’s attractive to many investors because it offers the opportunity to enhance returns; debt increases both risks and rewards.
At Property Partner, we take a considered attitude when it comes to risk, and will only list certain kinds of property with gearing, in order to reduce these potential risks.
Firstly, we do not offer geared investments on individual properties. Whilst it is possible to accurately forecast net income for an individual property on an annual basis, the same isn’t true for monthly returns, which can be volatile e.g. during void periods when the property is untenanted, and produces no rental income. This makes leverage less appropriate for individual properties, as there are a number of non-recoverable outgoings including council tax and utilities, which make monthly interest payments difficult to cover.
However, the risk is lessened for multiple units – whether they be groups of properties from the same development, or whole blocks of flats. With a larger number of units, there is a more stable stream of income as there are multiple tenants providing rental income. With this reduced income volatility, debt and interest payments become less risky to take on.
For this reason, we only offer gearing as an option for multiple unit properties. The more units in a property and/or the higher the rental yield, the greater percentage of leverage we will be comfortable using. Furthermore, we are only offering properties on our platform where the gross rental income forecast is comfortably higher than 1.25 times the cost of interest.
We typically structure the debt with a fixed interest rate period of between 2 to 5 years depending on the specific property and circumstances. The maximum term aligns with our 5 yearly exit protection mechanics (which you can read more about here).
At this point we can ‘go to market’ to renew the debt at prevailing market rates - with those investors that choose to continue holding their investment presented with an updated returns forecast. Further information on the mortgage terms for a respective property will be disclosed in the property overview page.
Gearing properties has a number of risks and rewards that are explained in this article here in more detail. Please note that we use the term Leverage interchangeably with Gearing or Geared.