Author Topic: Investment loan  (Read 3602 times)

winterbike

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Investment loan
« on: September 24, 2015, 08:31:37 AM »
Hey fellow mustachians!

Quick summary of my situation: Canadian, 28 years old, just bought a 4-plex. 16K in debt, but it can be covered any time with my current TFSA investments. I'm a teacher, currently without a contract, but unless Godzilla attacks, I'll be full time in a year tops.

I recently heard about investment loans. In my current situation, I could get a 75K loan (no initial money required from me) that I would need to invest in mutual funds. It seems like a promising thing, but I want to really weigh the pros and cons.

- I want to start with a 50K loan.
- No margin call.
- Interest rate is variable
- There is a penalty if you drop out early, but it decreases every year. No penalty after 6 years.
- I can choose my mutual funds, provided they are with a company on a list they provided (wide choice, no vanguard). I plan to go full passive here, something like 25% Canada, 25% world and 50% US.
- Every month, I receive an amount of money based on the annual returns, and must pay a part of the capital and interests (calculated over 20 years). If the returns are high, I get extra pocket money (not much, but free money is free money). If the returns are low, I must pay the difference.
- The plan here is long term. I don't plan on touching the money for a few years at least.

For perspective, here's a worst case scenario with someone getting a 100K loan right before the 2008 crash.



Seems like the risks are manageable. Thoughts?


Retired To Win

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Re: Investment loan
« Reply #1 on: September 24, 2015, 08:36:17 AM »
What would the specific interest rate calculation look like in your case?  And is it correct to assume that the account's plus/minus status would be reconciled monthly?

Argyle

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Re: Investment loan
« Reply #2 on: September 24, 2015, 08:49:40 AM »
Well, I think it's crazy and you're asking for trouble.  Furthermore you already have $16,000 in debt.  What are you paying in interest on that debt?

And you're going for a $100,000 loan and you don't even have a job?  There's a whole lot here banking on "I bet it will work out okay?"

Why not do some saving and then invest your savings?  That way, even if you don't come out ahead, at least you don't end up owing a shitload of money.

winterbike

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Re: Investment loan
« Reply #3 on: September 24, 2015, 09:02:56 AM »
What would the specific interest rate calculation look like in your case?  And is it correct to assume that the account's plus/minus status would be reconciled monthly?

3.7% at the moment. It think it is correct, but I'll check further.

winterbike

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Re: Investment loan
« Reply #4 on: September 24, 2015, 09:07:27 AM »
Well, I think it's crazy and you're asking for trouble.  Furthermore you already have $16,000 in debt.  What are you paying in interest on that debt?

And you're going for a $100,000 loan and you don't even have a job?  There's a whole lot here banking on "I bet it will work out okay?"

Why not do some saving and then invest your savings?  That way, even if you don't come out ahead, at least you don't end up owing a shitload of money.

6.5% interest on the 16K debt. Easily manageable at the moment.

No job right now, but unemployment checks coming for the next 36 weeks, plus I have lots of substitute teaching possibilities.

I plan on saving and investing too. I see this loan (50K for me, 100K was just to show a worst case scenario) the same as a mortgage loan, except I invest in the stock market instead of a rental property.


DaveR

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Re: Investment loan
« Reply #5 on: September 24, 2015, 09:26:33 AM »
Well, I think it's crazy and you're asking for trouble.

+1

Leverage equals risk, so you might come out ahead, or it could all come crashing down before you know what hit you. If you are good taking a $50k or $100k loss without a worry, then maybe think about it.

If the 4-plex is your first investment property and landlording experience, it's best to get that asset stabilized and make sure you have a good handle on the income and expenses involved.

K-ice

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Re: Investment loan
« Reply #6 on: September 24, 2015, 10:37:57 AM »
I'm confused. You just bought a 4-plex but only 16K in debt?

Did you pay cash? Lottery? Inheritance? Or what is your mortgage?

Thx for clarifying.

jjcamembert

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Re: Investment loan
« Reply #7 on: September 24, 2015, 11:07:15 AM »
I wouldn't do it. The interest rate and mutual fund fees are going to make it so you need the stock market to return about 4% just to break-even. And there's a variable interest rate on the loan. You're carrying a lot of risk for minimal reward, while the mutual fund managers get paid regardless of profit/loss. And if this is all the same company, they also get paid interest on your loan! Win-win on their side ;)

If I was going to accept that much risk I'd want a higher potential return, not an average market return.


winterbike

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Re: Investment loan
« Reply #8 on: September 24, 2015, 01:36:14 PM »
Well, I think it's crazy and you're asking for trouble.

+1

Leverage equals risk, so you might come out ahead, or it could all come crashing down before you know what hit you. If you are good taking a $50k or $100k loss without a worry, then maybe think about it.

If the 4-plex is your first investment property and landlording experience, it's best to get that asset stabilized and make sure you have a good handle on the income and expenses involved.

Is there a potential scenario where I could get a 100% loss on 50K in stocks? Worst case here is the stocks go down, I have to pay 100-200$ a month for a few years and have to wait for the storm to pass, no?

A 100% loss is an apocalyptic scenario, I'll probably be too busy fighting zombies and Godzilla to care about my losses.

winterbike

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Re: Investment loan
« Reply #9 on: September 24, 2015, 01:41:53 PM »
I'm confused. You just bought a 4-plex but only 16K in debt?

Did you pay cash? Lottery? Inheritance? Or what is your mortgage?

Thx for clarifying.

Mortgage is there too. 244K at the moment. 2 rents pay it off. Third one pays for insurance and electricity. GF and I live for free in the fourth one.

I have 16K on a line of credit, but 13K in stocks too. 4.5K in student debts, but interest rate are 3.5% and I pay 50$ a month. Given the inflation rate, I'll try to ride that one forever. No car.


john c

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Re: Investment loan
« Reply #10 on: September 26, 2015, 04:59:25 AM »
If you have 50% debt to equity on an investment, and the investment goes down 50%, you have lost 100% of your equity.  Poof!

This is not a scenario where you'd be fighting off zombies and Godzilla.  Many US and global funds did this in 2000 and 2009.  While the markets as a whole have recovered, that's not the case in Japan after the 1989 crash.  The Nikkei peaked at 38916 on December 1st 1989.  It closed yesterday at 17880.  Still down 54% after 26 years.  Canada has a smaller economy and market than Japan.  Also, if you invest in foreign stocks or funds, currency changes can kill you. 

In short, you know NOTHING about this.  Don't do it. 

There's a great saying in poker that applies to investing.  If you sit down at a table and can't see who the sucker is, then it's YOU. 

K-ice

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Re: Investment loan
« Reply #11 on: September 26, 2015, 08:33:02 AM »
I see it as too risky with not a lot of gain.

Here is my quick back of the napkin math.

Interest rate ~4%. Payment on loan 50K 20y --> $300 per month. Check but if the MF makes nothing, or less than this, you could be on the hook for this each month.

Note that in 6years when you want "out" you will still owe $39,000 on the original loan.
And you have paid them a $h!t load of interest.

Then add Mutual fund fees 1-3%. (maybe your case is different)

Estimated cost to borrow and invest money 5-8%.

So you need to be very confident your Mutual funds will bring in that much per year.
Ideally, they will bring in about 4% more than costs.
Please share if you know a MF that consistently brings 9-12%.

Although the last few years in the market look good (that's what the salesman will show you) they can't predict the future.

In your situation, I would get off of unemployment insurance, find a job, save between 10-20k per year and invest on my own. Your cost of living is almost nil so congrats on that.

Soon you will have your own 50K invested in something with low fees in no time.



cincystache

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Re: Investment loan
« Reply #12 on: September 26, 2015, 12:45:03 PM »
if you are looking for confirmation that this is a good idea, you are probably asking the wrong group of people. Mustachians typically (not always) follow proven methods of wealth building: minimize spending, maximize saving, invest in low cost index funds until you have enough capital to support your lifestyle with a comfortable asset allocation.

Borrowing to buy stocks, as others have already said, increases your risk and will amplify both success and failure in your investments. If it was a sure and easy path to wealth creation everyone would already be doing it, the lender is betting they will make more money than you in this transaction or else they wouldn't do it. There is no free lunch and no shortcuts in my opinion.

That being said, I wish you luck no matter which route you take and keep us posted on the outcomes so we can all learn from our successes and failures. If you make millions off of this I'll be the first to congratulate you!