dothesums blog

Link: http://www.dothesums.co.uk/blog

Like a lot of things in life, balance is important. So it is with risk. Avoid all risk and we would avoid almost all activities, at least those of any value.
We would all agree that risk is acceptable, too little and we will have inaction or stasis, too much and we leave ourselves open to danger and disaster.

Appropriateness and balance is the key; so it is with capital.
Too much capital invested in a project and we get slower growth for a given value of profit, or sales revenue.
Too little and the project will be subject to the dangers of cash flow shortages and higher costs from increased borrowings.

What then is the right ratio?
1:1 (50%), is probably fine
1:2 (66%), is usually OK
1:3 (75%), may also be OK
1:4 (80%), begins to ring alarm bells
1:5 (83%), possible danger
and so on.

In property, as in general business, the big idea is that you use leverage to magnify and grow the return on owner's capital, whilst at the same time balancing this with the dangers of higher gearing.

We are finding that there are still people around advocating no-deposit property purchases from distressed sellers at below 'so-called' market values.

Buyers beware.