Maximizing Wealth: How to Utilize Debt for Investment – 360 Financial Strategists

Using debt to invest can be a powerful strategy for growing your wealth. Whether you’re considering a private debt investment or taking out a mortgage for an investment property, understanding the benefits and risks is crucial.

Many people say that debt is bad and should be avoided. While this is often true, debt can also be a powerful tool to help you build wealth and be part of your investment plan.

When it comes to investing, debt can take many forms, such as investment property mortgages, using the equity in your home for investments, margin loans, and funds or ETFs that include debt.

Benefits of utilizing debt to invest

  • Affordability: Debt allows you to buy assets you couldn’t afford otherwise. For example, buying a property would be much harder if you had to save 100% of its value. Most property investors use debt to enter the market.
  • Tax Deductions: Interest paid on debt for an investment is often tax-deductible. This is why strategies like negative gearing are popular.
  • Increased Gains: Debt can amplify your gains. If you invest $50,000 in shares and they increase by 10%, you make $5,000. But if you use a margin loan to invest $100,000, a 10% increase would give you $10,000.
  • Greater Investment Reach: Using debt can increase the amount you have to invest, allowing you to buy more assets and diversify your portfolio.

Risks of utilizing debt as investment

While debt can be a powerful and sometimes necessary part of your investment strategy, it also comes with additional risks. For example, while debt can magnify your gains, it can also magnify your losses during uncertain times. This means you could lose more than just your initial investment since your debt is also affected by market fluctuations.

Interest on debt can eat into the profits of your investment and affect your current cash flow. If you use margin loans, you risk margin calls, which require you to add more money to your investment if its value drops.

Additionally, because there is interest associated with the debt, your break-even point for the investment will be higher. A rise in interest rates could also negatively affect your cash flow and the net performance of your investment.

Careful consideration is crucial when using debt for investment purposes. It’s important to ensure you have a repayment strategy before entering into such an arrangement.

You also need to consider your cash flow not only if things go as planned but also in case of unexpected events such as rising interest rates, job loss, injury, or illness.

Therefore, an insurance and cash flow plan should go hand in hand with any debt strategy. It might also be wise to explore fixed interest rates to reduce interest rate risk and consider your loan-to-value ratio as well as your long-term investment strategy.

Turn your debt into powerful investment tools with our guidance! A financial advisor can guide you in making the right financial decisions.

To find out if our strategies are right for you, feel free to contact 360 Financial Strategists online or on 03 9427 0855.