What is gearing?
Gearing is simply borrowing money to invest – in property, a business, shares or managed funds. It basically helps you boost your potential investment returns by increasing the amount of money you have available to invest.
How does it work?
Let’s say you want to invest in a rental property. You borrow most of the money to invest and hope that the value of your property increases over time so you can make a capital gain.
While you may generate rental income, you also have outgoings like interest on your loan, managing agents’ fees, council rates, strata fees, building repairs and depreciation on the value of the property.
Depending on your situation, gearing is basically the difference between the costs of owning your property and the income you can generate from it. This can go either way, negative, neutral or positive and each have different effects.
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