Property investment: gearing and portfolio returns

Abstract

PurposeThe aim of this study is to comment upon the relatively straightforward but often misunderstood role of gearing (or leverage) on the potential equity return of a property investment portfolio.Design/methodology/approachThis education briefing is an explanation of the how the addition of individual assets to a portfolio can, with gearing, impact upon the portfolio return.FindingsAlthough, this case study is relatively straightforward, it shows how portfolios can be geared to give enhanced returns at differing, aggregate and levels of risk.Practical implicationsThe 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/valueThis is a review of existing models.