There is a common misconception that debt is bad and should be avoided at all costs. That’s not true. Debt can either be good or bad depending on how it is used. You can use debt to buy assets or use it to build wealth. However, even as you get into debt, it is good you have a plan on how to repay it back. In this article, we are going to focus on how to buy assets with debt and find out some of the best assets to buy with debt.
Ways to Buy Assets with Debt
The following are ways how you can use debt to buy assets and create wealth,
1. Real Estate
One of the best ways of using debt is by buying real estate with debt. You can get a mortgage and use it to buy a home or land. Most mortgages come with favorable terms like reasonable interest rates. Getting a mortgage is better compared to renting since it offers tax deductions and lower monthly payments.
Besides, you can buy a home and rent it out. This way, you will be earning a passive income while your property’s price is appreciating. However, you should have a plan on how to repay the mortgage even when your properties are not generating income like when they are vacant.
2. Student Loans
Student loans are human capital investments that can help you secure future employment. Through education, you can increase your prospects of getting a good job and increase your earning power. You can use student loans to increase your chances of earning a high income in the future and use your income to repay your student loan.
3. Commercial Loans
You can also use commercial loans to buy assets for your business. For instance, you can borrow a loan from a financial institution and use it to purchase business equipment. It is a great way to buy assets for your business without draining your savings.
You can also use business loans to buy business equipment, pay employee salaries and wages and increase business supplies.
4. Margin Investments
You can use margin investments to buy assets like stocks. Investing in margin can increase your purchasing power more than your actual money. For instance, if you want to buy stocks worth $50,000 and you have $25,000, your broker can loan you $25,000 so that you have a total of $50,000. You can then purchase stock worth $50,000. When the stock prices increase, you can repay the loan and keep the capital gains.
If there is a drop in your account equity below a certain level, your broker can issue a margin call. In such a case, you can deposit more funds in your account or sell your stock at a loss.
5. Hedge Funds
The other way you can buy assets with debt is through hedge funds. Hedge funds pool money from investors for investment through strategies like securities, real estate, and commodities. The money is then managed by a professional fund manager.
Fund managers sometimes can make wrong investment strategies that can lead to the loss of investors’ money. As such, it is worth noting that hedge funds are a risky investment that requires a high minimum investment. It is an investment for high-net-worth accredited investors.
6. Short Selling
You can leverage short selling to buy assets with debt. Short selling is an investment strategy where an investor bets a decline in the value of stocks. The investor then borrows stock shares from third parties anticipating the value of the asset will fall. The investor then finds a buyer and sells the borrowed shares at the going market price.
Summary of How to Buy Assets with Debt
The above are some of the ways you can use debt to buy assets. While debt is perceived as a bad thing, when used well, it can result in wealth creation. For instance, wealthy people know how to use debt to create wealth. You too can do it. With financial literacy and knowing how money works, it is possible to use debt to buy assets.