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Gearing (leverage) in Real Estate

The Gearing in the Real Estate context, also called Leverage, refers to the part of an investment that is financed by debt relative to the part of an investment that is financed by equity


The level of gearing can be measured using the following ratios; Debt-to-equity ratio, and loan-to-value ratio (LTV).



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In a Real Estate investment it's important to balance the mix of debt and equity. If to much debt is taken, an equity investor might see the investment as risky and demand a higher return.


An increase in the required return, from the equity investor, can eliminate the benefit gained from the debt financing.


Lenders will demand a higher return, as highly geared (a greater ratio of debt to equity) an investor's project is. And it will be harder to borrow more founds.




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