Whether you’re seeking to diversify your portfolio or set yourself up for a more comfortable future, investing is a smart move in this economy. Regardless of what venture you choose to put your money into, it is likely you may need a bit of extra cash as a stepping stone.
Investment loans are perfectly acceptable and far more common than you might realise. Having said this, let’s look at the key concepts to put some thought into before taking out an investment loan.
What are your investment goals?
Don’t borrow blindly. Don’t take any long or short term loans with the vague idea that you will be putting this money towards investing. Before you even contact a lender or broker, create some clear goals to work towards.
For example, stating you want some more money to retire with, is a weak goal. Try something more substantial, such as, in fifteen years you’ll be receiving a 120k per anum return from your investments that you will use to travel the world. This way, you can work out precisely what you’re going to need, and you’ll have an idea of where to invest to make this return.
If you find it difficult to gauge precisely how you can make this happen, or what a realistic goal might be, consider getting in touch with a financial planner or advisor.
Understand good vs bad debt
Generally, debt is frowned upon regardless of its purpose. For you to do well with investing, you will need to change this mindset. Good debt is any debt invested in an asset that will grow in capital value. For example, borrowing money to buy and refurbish a home in a rapidly developing suburb. Doing so means that there is potential for your investment property to increase in value with time; therefore, your debt serves a purpose.
Bad debt is borrowing money to buy shares that have no long term value, and no potential tax deductions attached. Such as buying a car and believing that it will be an investment. Cars depreciate as soon as you purchase them, meaning that you will inevitably make a loss.
If you know taking the loan will help you build wealth, then it means you are taking good debt.
What should you invest in?
Typically, when deciding where to invest, you have two main options: property or shares. Shares are more volatile than an investment property, meaning the risk is slightly higher. If you are going to borrow to invest in shares, it may be a smart decision to diversify across industries. This is to avoid putting all your eggs in one basket and making losses across the board if something sours.
Property is not without its risks, however, especially if the house you pick requires significant renovations. Inexperienced renovating can promote a loss if you end up going over budget. Investing in property also comes with a lot of extra costs, including legal name changes and various insurance.
Think long term when making your decision, again, a financial advisor may be a good idea if you are new to investing. Whilst shares can often be relatively small initially; they have the long term potential for more significant capital gain than property. So, figure out what works best for you.
Have a plan B
Finally, before taking a loan of any description, you need to arrange a safety net for your potential venture. A general rule to keep in mind when taking any investment loan is that borrowing will magnify whatever your outcome will be.
This means that if you were to buy $100 of shares, with your cash, the outcomes would be smaller than if you take a loan for $600 of shares. This can go both ways. If you profit, obviously your $100 will not be as great. However, if it is your own money and you make a loss, it won’t be as terrible as it could be, because you won’t have to pay off your loan on top of a loss. So, create a substantial emergency fund to cover yourself in preparation for the worst.
These are just some of the basics to consider before taking an investment loan. Hopefully, they can promote a mindset that will help make your investment ventures profitable. Keep in mind, regardless, that it is always a good idea to speak to a financial advisor before making any large monetary decisions.
Good luck with your future investments!