How to earn double-digit returns from Polish property
As readers of my articles might recall we have, for many years, been earning double-digit returns from our property investments in Poland. There are many factors which have contributed to this success but, in a low-interest-rate environment, a key component of delivering such returns has been the use of leverage.
The overuse of leverage was the main cause of the boom that ended in the bust of 2008. Since then leverage has been shunned by many investors – to their own detriment. Interest rates have been at record lows for many years now (in negative territory in the eurozone) and unlikely to increase dramatically. So, when buying properties yielding 7.5% or more per annum (which we have been consistently able to do for over ten years), leverage serves to magnify the income returns earned by investors.
Indeed, in markets such as Poland, the prudent use of debt to finance properties not only boosts returns but can help to reduce risk. There are several reasons for this but the main one is that it reduces the amount of equity required and, with the double-digit returns which leveraged investments produce, allows investors to accelerate the repayment of their equity, often within a five-year period or less. An investor’s position can therefore be de-risked within fairly short order without relying on market liquidity. This is in stark contrast to the payback period associated with investing in, for example, prime London property on yields of around 4% per annum – which is roughly 25 years and very much subject to market liquidity!
But debt must be treated carefully for the risk of its use to be mitigated. Here are the six rules which I always follow: