Financial leverage refers to the use of borrowed funds (debt) to finance investments or operations. Today, many investors choose to put most of their wealth in assets with greater earning potential over cash returns which have historically underperformed stocks and fixed income. Leveraging is a crucial concept in investing and finance, allowing for profit amplification by utilizing debt; however, it also increases the risk of larger losses if the investment doesn’t succeed. That’s why understanding financial leverage is crucial in helping you make informed decisions to optimize your financial performance. Here are some ways to tap into the value of what you own while keeping your financial plans intact.
Public market investments
Did you know you can borrow against the value of your investment portfolio without selling any of it? With a securities-based line of credit (SBLOC), you can unlock the liquidity of assets like stocks, bonds, exchange-traded funds (EFTs), and mutual funds without selling them. While SBLOCs typically can’t be used to buy more securities, they can provide funding for real estate, business interests, or lifestyle purchases. However, it is important to remember that your loan is tied to the ups and downs of the market, and while it provides flexibility, it is not risk-free. If the market drops and your portfolio’s value falls too far, the bank can require you to either add more securities or pay back some of the loan, sometimes on short notice (commonly known as a margin call).
Real estate
Real estate is where the magic happens for leveraging assets and building net worth, creating funding and opening doors to new opportunities. Buyers can tap into multiple financing strategies to make their move in the real estate market. Some borrow against their investment portfolios, enabling competitive all-cash offers without selling securities. Potential borrowing solutions include home equity line of credit (HELOCs), a margin loan from a brokerage firm, or a securities-based line of credit from a bank. However, while fast and flexible, this method carries variable interest rates and the risk that lenders could demand repayment or additional collateral.
Alternatively, primary homes, investment properties, and commercial buildings can serve as collateral themselves to secure a loan. Common structures include HELOCs, cash-out refinancing, and asset-backed mortgages. These types of loans may require more paperwork and setup time, but they can provide larger amounts of capital and higher loan-to-value ratios, especially for income-generating properties. Both approaches unlock opportunities in real estate, helping investors grow wealth while balancing liquidity and risk.
Specialty assets
Certain high-value, non-traditional assets such as art, collectibles, luxury cars, or rare jewelry can also be used to access liquidity. Some lenders specialize in providing loans against these items, allowing you to unlock cash without selling your prized possessions. This can be useful for funding big purchases, investments, or unexpected expenses. However, these loans often have higher interest rates and shorter repayment terms than traditional loans and appraising the value of the assets can be more complicated. The market for selling these items is also less liquid, so it can take time to convert them to cash if needed. Even with these challenges, borrowing against specialty assets can provide an alternative way to tap into wealth while keeping the assets intact.
The potential benefits
Even with plenty in the bank, borrowing can be a more practical choice when considering cash availability and potential tax efficiency. Loans don’t count as income, so borrowing against your assets doesn’t trigger taxes, force you to sell investments, or disrupt your long-term plan. In some cases, loan interest payments may be deductible against your taxable income when loans are used for investment purposes. When approached as part of a thoughtful wealth management plan, borrowing can be paired with smart timing such as refinancing when rates drop or home values rise to create a repeatable path to long-term wealth. This approach lets you tap into the value of what you already own without giving up liquidity, which is why searches for “use debt to make money” and “how to leverage debt to build wealth” are on the rise.
The potential risks
Leverage can multiply the pain of a downturn without proper planning, so it is important to consider the potential risks when borrowing against your assets. During a downturn, asset values may drop, putting a strain on available cash or forcing untimely sales that could trigger tax consequences, and rising interest costs can increase your payments over time. Additionally, Real estate and specialty assets may take longer to appraise and process, making them more difficult to sell quickly during a downturn. It is also important to keep in mind when loan restrictions apply and what that means for how you can use the money.
Bottom Line
For high-net-worth investors, borrowing isn’t always about needing more. It’s about using what you already have in a more strategic way. But like any major financial decision, it is important to consult your advisors, tax professionals, and estate planners to assess the potential risks and determine the best strategy for your financial and personal goals.
Don’t let your net worth sit still. Contact your Park City Financial Advisors today to ensure the assets you’ve worked hard for are working for you.
Sources:
https://www.investing.com/academy/analysis/financial-leverage-definition/
https://www.schwab.com/learn/story/leveraging-your-assets-to-manage-your-wealth
