You’ve just bought your house in Spain and because you got such a good deal you now find you have money in the bank. It isn’t a huge amount but with your pension taking care of daily business you decide you want to invest the money. Lets say you have $20,000 to invest.

How do you get the best returns on your money?

Clearly you could put it into a high risk fund and hope for the best. A good fund will give you a return of about 15-20%.

But what if you could get a similar return by investing in safe government bonds at a mere 5% return. Impossible I hear you cry because the very nature of these bonds means you will be lucky to get 5%. And you may be right.

So let me introduce you to the concept of gearing. It is a concept you will be familiar with even if you don’t fully understand it.

When you buy a house for say $100,000 and have $20,000 to put down – you take a mortgage for $80,000. Your property sells three years later for $150,000, which means your $20,000 has turned into $70,000 – a return of 250% on this $20,000 investment or around about 52% compound annual interest.

This is what is called gearing. You have used the banks money to increase the value of property you could buy. 3 years later when you sell your property it has increased in value substantially more.

Now had you bought a property worth $20,000 and paid outright for it, then your property (assuming the same sort of growth) would have been worth $30,000 – a mere 14.8% annual interest or thereabouts.

So how do you apply this to bonds and get similar returns? Very simply – you find a bank – your own for example that will raise a mortgage on your house for the investment. Say you have $20,000 to invest, you get a mortgage of say $80,000 (for the sake of argument and ease of calculation) giving a total of $100,000.

Now we invest this into a bond that gives a steady 5% per annum. Lets see what that does for us.

Note table 1 assumes the mortgage is paid for separately from the fund. If the fund pays the mortgage then table 2 is the more accurate return.

In order to see the rest of this article - including the table of returns go to www.spanishproperty-direct.co.uk/article_finance1.htm

For more information about buying in Spain and how to avoid paying too much for your property - check out www.spanishproperty-direct.co.uk/book.htm. For other interesting articles on buying a property in Spain visit the website www.spanishproperty-direct.co.uk - you can even get a free Course of Spanish Lessons.

Vince Barnes is the owner of http://www.SpanishProperty-Direct.co.uk – a website aimed at informing buyers about the process of buying in Spain and keeping up to date with news and regulations affecting the Spanish Property Market. He has also just published the book – “The Insiders Secret Guide To Buying A Property In Spain – The Book Estate Agents Don’t Want You To Read” – available at http://www.spanishproperty-direct.co.uk/book.htm

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