Borrowing to Invest: Understanding the Risks

Borrowing to Invest

Borrowing to InvestWhen it comes to property investment, you are more likely to borrow funds to afford the investment cost. Borrowing to invest can be a sound strategy, as it can help increase your returns when markets are rising. It makes sense if the investment return is greater than the total amount of the loan, including interest and additional fees.

While there are benefits that come with borrowing to invest, it is not right for everyone. Before you commit to taking on this kind of debt, it is important to understand the risks the come with it. The more you borrow, the bigger the risk becomes, as you need to pay for it no matter what happens to your investment.

Income Risks

The returns or the income you receive from the property investment may be lower than what you anticipated. This is why it is best to ask yourself if you’re comfortable taking on debt for an investment that may change in value. The Sentinel Property Group suggests seeking advice to identify capital growth potential and tax benefits before investing.

Rates Risks

The interest rates of the loan could increase, so it important that you have surplus funds to afford the repayment. If you use collateral to put up the loan, for instance, understand that you may lose any asset used as collateral, and even your home.

Value Risks

Investors don’t want it to happen, but there are cases in which investment falls in value. The returns could stop due to injury, sickness or redundancy. You should have a plan to manage this, or other sources of income like a cash reserve or a secure salary.

Taking the Plunge

If you have decided to borrow to invest, make sure your investments are diversified. This will lower your risk if your investment performs poorly. Diversification won’t totally protect you against losses but it can help you achieve more stable returns over time.

Borrowing to invest is a risky proposition and may only work for experienced investors. If you are considering using this strategy, seek independent financial advice. Think carefully if you have the discipline, and ensure that you know and understand all the risks before making a decision.