Property and investment

January 4, 2007 11:52 am Dave Neary General

One of the most controversial blog posts I’ve written here hasn’t been about software, it’s been about French property prices.

I recently bought some shares (for the first time) and following share prices has caused me to think about why investing in property is such an attractive proposition.

The answer is leverage.

The way leverage works is simple – if I invest €100 of my own money into something, and it goes up in value by 5%, I make €5, or a 5% return on investment. If I invest 10 euros of my own money, borrow €90, it goes up 5%, and I reimburse €92, I’ve made €3, or a 30% return on investment.

Mortgages work the same way – if I buy an apartment for €150,000 and resell it for €200,000, then the more I have borrowed from the bank, the greater (in percentage terms) my return on investment.

Investments which go the other way also magnify the effect – in that initial example, if I put €10 of my own money, and I lose 5%, when I’ve paid back €92, I’m left with only €3, a loss of 70% of my capital. I can also end up in debt if the investment loses any more than 8% of the initial value.

How do people get leverage for investments other than the property market? I have no idea. I would love to find out, though. Anyone have any tips?

7 Responses

  1. Pádraig Brady Says:
    January 4th, 2007 at 10:30 pm

    Hi Dave.

    The equity equivalent to property mortgages
    are equity options: http://tinyurl.com/y59mzt

    Yes, you can buy options as well as receiving
    them from companies you work for 🙂

    You make the insightful point above,
    that both mortgages and options are
    a risky investment method.

  2. bart Says:
    January 5th, 2007 at 12:40 am

    … risky investments indeed. as anyone knows who has played Railroad Tycoon. For those who haven’t : in that game you can buy shares from Railroad companies with borrowed money. However when the stock price goes down and the value of your total assets exceeds a certain ratio to your debt you get a margin call from the bank : a forced sell just as with property and usually at great losses…

  3. jpl Says:
    January 5th, 2007 at 1:07 am

    I’ve only heard this referred to as buying investments on “margin”, not leverage.

    http://en.wikipedia.org/wiki/Margin_%28finance%29

    Anyway, most investment banks (E-Trade, etc) will offer margin for anyone with an account with them.

  4. Joseph Says:
    January 5th, 2007 at 1:53 am

    IMHO, the best way to invest in houses and land (I hate the term “property”; it totally removes the point that people usually *live* there) is to buy a house. It’s not like you have a choice in the matter–you have to live somewhere, and you may as well get *some* money back at the end of it. But taht’s probably where I’d end it, except as maybe a (small!) method of diversifying my portfolio.

  5. Stéphane Says:
    January 5th, 2007 at 5:37 am

    http://www.immonot.com/tendMarche.do

  6. AP Says:
    January 9th, 2007 at 8:36 pm

    Dave, the property market is at its peak. Chances are prices will go down.
    http://www.bulle-immobiliere.org/

  7. Dave Neary Says:
    January 9th, 2007 at 8:43 pm

    Antoine, bulle-immobiliere has been saying the same thing for the last three years – “just wait until the crash, you’ll pick up the same apartment that pigeon bought for 150K€ in a few months for 120K€” was what they were saying back then. Now they’re saying “just wait until the crash, you’ll pick up the same apartment that pigeon bought for 250K€ in a few months for 200K€”.

    The only problem is that they’re talking about *the same apartment*.

    Excuse me if I don’t put too much faith in people who refuse any discussion of viewpoints not in agreement with theirs.