Am I right to chose investments that can be geared?

Conrad

Wondering what to invest in next.

My general querry is am I right to carry on chosing investments that allow me to gear - up, that is borrow in order to increase the exposure to capital appreciation?

For example I see many people who put say £20000 into a bond or other packaged investment, whereas I tend to want to put it into property as I can borrow further in order to own a larger asset.

My logic as follows:

£20000 into a packaged investment and the price doubles I get £40000.

£20000 into a property (mainly foreign property now, not UK) and borrow say a further £50000 with rent broadly covering the interest, and the price doubles so I make £70000.

Of course the risk is higher (although Im not so sure as many people lose money on packaged investments) and I may have to subsidise the mortgage payments from time to time (although not the case on property leasebacks for example one Ive just done with 9 years rent).

What have I missed - why is'nt everyone doing this?

dunstonh

The only issue is risked. Gearing is common with experienced investors and many do it without even realising they are. (have mortgage or loan but also have investments).

Would you be doing the gearing or would you be using investments that borrow at investment manager level? (such as investment trusts)

Conrad

I would doing the gearing via ordinary, albeit foreign, mortgages.

amcluesent

>why is'nt everyone doing this<

Everyone who has an interest only mortgage is!

But houses aren't that sensible for gearing, there is the problem of market liquidity (how many people are in the market).

If you are gearing, you could equally well borrow money to buy shares, go short, buy warrants or look into spread betting.

I guess most people are wary because most markets exhibit asymmetric information (insiders dealing) and the potential losses are also geared.

PLus most peeps don't even understand compound interest, the concept of net present value or how to compare APRs!

Chrismaths

But houses aren't that sensible for gearing, there is the problem of market liquidity (how many people are in the market).

Actually, the illiquidity of houses is a benefit as far as gearing goes. Because you don't have to 'mark to market', if the debt becomes bigger than the asset (in housing terms "negative equity"), you simply hang on, as most londoners who bought property in the early 90's had to. Then when the price of the asset comes back, you can still make a profit.

However, with financial instruments that are marked to market, you end up with margin calls that must be met - wiping you out. Illiquidity is actually a bonus when talking about security for debt.

amcluesent

>owever, with financial instruments that are marked to market, you end up with margin calls that must be met - wiping you out<

But real-estate flippers can still get a foreclosed if the loan is called in.

Chrismaths

But real-estate flippers can still get a foreclosed if the loan is called in.

No they can't. Only if they miss payments. Keep making the interest payment and the bank can't foreclose (or repossess in English). That's what the mortgage contract says.

Conrad

Here's a nice property investment I've found;

My capital input = £22050, balance on a more or less guaranteed mortgage.

Price £73000.

8% minimum guaranteed yield.
15 year rent guarantee.

Property is 5* resort in the shape of a palm built over the ocean near to the F1 circuit and Malaysia's silicon valley.

Very safe developer - Swiss Bel.

Conrad

Here's a nice property investment I've found;

My capital input = £22050, balance on a more or less guaranteed mortgage.

Price £73000.

8% minimum guaranteed yield.
15 year rent guarantee.

Property is 5* resort in the shape of a palm built over the ocean near to the F1 circuit and Malaysia's silicon valley.

Very safe developer - Swiss Bel.

Chrismaths

Rent: guaranteed by who? in what currency?

"Guarantee" means there is a "Guarantor" - you need to assess the abitility of the guarantor to pay.

What's a "more or less" guaranteed mortgage? What's it secured on? What is guaranteed?

Is there any local tax? Are you going to account for tax here? What's your exit strategy? How do they treat property owners in Malaysia? What if the government changes? What if the palm sinks ?