Buying investments with borrowed money sounds like a high-risk strategy. What if the investment values collapse? You will still owe the money borrowed and the investments will be worth less than the amount borrowed. It could be a disaster. Something to avoid.

Wait a minute. Isn’t that what happens when you buy your first home? You pay a small deposit, borrow most of the purchase price, and work really hard for many years to pay it off. In time the value increases, the debt reduces, and your net equity grows.

That’s how people build wealth from a very small start. If you borrow to buy an investment property instead of your home, you gain two extra benefits. First, because you aren’t living in the house you can rent it and collect income from it, which can be used to help pay the loan off.

Second, because the loan is taken for investment purposes, rather than the personal reason of buying your home, the interest is tax deductible. So the net cost is much less. For example, if the loan interest rate is 6.5 per cent, after the tax deduction the net cost is likely only around 4.4 per cent.

It is possible to borrow to buy a wide range of investments, not just houses and units. It could be a small farm, or good quality shares, or managed funds. All those can work well. It would be too risky to borrow for speculative shares.

Borrowing to invest in shares and funds can be done in smaller amounts than a property, and can be increased or decreased easily, unlike a property.

Interest rates are currently quite high, a reason to hesitate. However they have come down one notch with more reductions likely in time. Rates are only high because inflation is high and when that’s the case, asset values usually grow faster.

It is essential to research investment proposals carefully, seeking an asset with growth potential at an attractive price. A long timeframe is important to ride out fluctuations in value. And you must be sure you have the income to meet the loan payments.

Investors must work hard to find a good deal, something with extra potential that others may have missed. Some properties can be improved inexpensively. Many investors use managed funds run by professional managers.

Now is the ideal time to start a new plan. If it is set up before June 30, next year’s expenses can be pre-paid with the deduction claimed in this tax year.

Most people who have built wealth from a small start have used borrowing to do it. Young people keen to get ahead shouldn’t be put off by the risks, interest rates, or challenge of finding a good deal. Professional advice can help.