Thinking about ways to build wealth this year? Consider borrowing. Young people usually think of taking out a loan as a way to buy a car or a home. However borrowing can also be a great strategy to build wealth.

Buying a home is certainly a positive step. Over time its value will grow, contributing to wealth. However borrowing to buy investments has two extra benefits.

Firstly, the investments will usually provide income as well as growth. Obviously if you are living in the property yourself, there is no income. Secondly, the interest on investment loans is usually tax-deductible, whereas the interest on home loans is not.

The investment can be a residential or commercial property. If so, there will be rental income, capital growth and tax-deductions for the interest. The rental income will be assessable for tax, but the property expenses and interest will usually be greater, reducing overall tax due.

The investment can be managed funds or shares. In that case there will usually be dividend income, capital growth, imputation tax credits, and tax deductions for the interest, again providing tax savings.

An example demonstrates the benefit of gearing best. Suppose you pay $100,000 deposit and borrow $400,000 to buy a $500,000 unit. If in time the value rises 10 per cent that is $50,000 on the $500,000. However it is a 50 per cent return on the $100,000 deposit you outlaid.

Those who have equity in their home may be able to use their home as security for the loan and borrow all of the purchase price of the property, shares or funds investment.

When buying a property a very large sum must be borrowed. When investing in shares and managed funds the loan can start small and be increased over time. It is flexible and can be varied up or down when needed to suit changing circumstances.

People who have little equity in their home, or don’t own a home, may be able to borrow using a margin loan. The interest rates are higher but borrowing can still be worthwhile.

Those who have no significant savings can start by setting up a savings plan into a managed fund. They can begin with $1,000 and add a regular monthly contribution. When the balance builds up, they can borrow against it and increase the sum invested.

If they continue to contribute regularly, borrow extra, and build the portfolio further, their net wealth will grow.

Investment plans using borrowings must be long term as returns aren’t always positive. In some years there are losses. Ten years is a good timeframe. It is also important for the borrower to have a regular reliable income to meet loan payments.