How can you make the most of financing in an investment and wealth management strategy?

Wealth management involves a wide variety of ingredients. You need to do more than simply search for and match investment opportunities to the investor's risk profile or find the most efficient tax formula; sometimes you have to resort to elements that are not usually taken into account. This is the case with financing, which usually takes on a negative connotation when associated with the word "debt."

Among the many tools available to a wealth manager or investor is precisely that, financing. Finding the right solutions to obtain immediate liquidity can often be an instrument to create and preserve the value of your assets. Therefore, we will take a look at it in greater detail in this article.

Before diving into the more technical details, financing can be so positive within a well-structured strategy that some of the richest men in the world (Mark Zuckerberg, Elon Musk, etc.) bought some of their real estate properties with mortgages. In other words, through financing, even though they could have done so without it.

The reason why relates to the opportunity cost of money. Essentially, it boils down to this: If a person, thanks to their good financial standing, can request financing from their bank at a reasonable or cheap interest rate, they can make the most of the borrowed money by earning more with it. This phenomenon was described by the popular economist Robert Kiyosaki in his various books as "good debt".

Perhaps it will become clearer with the following example. An investor requests a loan of €100,000 at 2.5% APR to be repaid in 10 years. In total, they would have to return a total of €114,259 to the bank. If you use that borrowed money, over that same period of time, in an investment opportunity that generates an annual return of 10%, you will have earned a total of €259,374. If you subtract what you pay back to the bank, the investor would gain €145,115 before taxes and without taking into account the effect of inflation.

Now we have seen how financing can be used as a lever to create more wealth, let's delve deeper into the different options available to investors.

• Mortgages

These are one of the cheapest loans for investors and, therefore, where some of the highest profits can be made. With a positive credit profile and a good real estate asset, you can obtain a low interest rate. This, as seen in the example, allows an investor to use an illiquid asset, such as real estate, to make it liquid and get a better return.

• Lombard loans

Lombard loans are an excellent option for investors because they allow financial assets to be used and disposed in order to obtain liquidity. For example, an investor can use their portfolio of assets as collateral, request liquidity from the bank, and obtain returns both from the assets they already had and from putting the new money they borrowed to work. This is another way to grow wealth and take advantage of the assets you already have.

• Market instruments

Financial leverage is a very common tool when it comes to achieving greater profits when investing. This process consists of investing borrowed money in structured products with the idea of amplifying the investment. This allows investors to open a position for double or triple the amount invested. As a result, if the investor contributes €100,000, uses a leverage of X2 and the investment rises by 20% over two years, the investor will earn a total of €40,000, instead of the €20,000 that they would have earned without this tool.

There are numerous advantages, since financing allows you to obtain new liquidity from existing assets or to use more technical tools to achieve a higher return than you would obtain with your own capital. Furthermore, investors can take advantage of investment opportunities offering a higher yield than the cost of financing and, depending on the investor's country of residence, certain tax advantages. In some countries, interest is tax-deductible, making financing even more attractive and profitable.

Therefore, this is a way to grow wealth faster and in greater volume and, at the same time, get more out of existing assets.

Financial decisions involve risk. In all three options, investors face different risks that should not be overlooked. If you are considering any of these options, keep these risks in mind to manage the financing properly. Therefore, it is advisable to discuss the strategy beforehand with a wealth manager to make the best decisions that make financing another tool in building wealth.

In the event of excessive debt or leverage without paying attention to the risks, assets can be severely damaged. Furthermore, it can lead investors to default, placing them in a complex financial situation.

With all that said, if used correctly within an investment strategy, financing is yet another tool that allows investors to build greater wealth in less time. However, it must always be done with a carefully defined strategy to avoid taking too many risks.

Robert Kiyosaki defined the concepts of good debt and bad debt in his popular book Rich Dad, Poor Dad. Among what he considers bad debt are debts used for consumption that also have high interest rates. We understand good debt as that which focuses on the purchase of assets that generate cash flow. In this way, that debt is used to generate wealth because the income obtained exceeds the cost of the loan.