Author Topic: invest money while paying 3% interest?  (Read 3721 times)

nereo

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invest money while paying 3% interest?
« on: September 30, 2014, 03:57:04 PM »
As a wedding "gift", my SO and I have been offered the opportunity to borrow up to $50k from a family member at 3% to "help us start out our lives together."  We could choose our term own up to 30 years.  We have no qualms about borrowing from this person - he's a former banker, very generous and has lent to other members for home down payments and college tuition over the years.

I'm soliciting opinions about whether, given a similar opportunity, you'd take the money and invest it.  Our plan would be to add it to our index funds and just let it compound, and assume/hope that over 10+ years it would return more than 3%.

A few details:  We currently have ~$100k in savings, no debt except our mortgage (which is at 3.04%, so no point using this to pay that down), and would have no problems making the automatic monthly payment on this loan.  We would be taking this exclusively to boost our 'stach.  We have no plans to spend it until FI, BUT one thing that does appeal to us is the idea that, should a catastrophic, $100k+ emergency hit we'd have the funds to deal with it.

Thoughts?


GGNoob

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Re: invest money while paying 3% interest?
« Reply #1 on: September 30, 2014, 04:19:13 PM »
Personally, I would jump at an opportunity like this. Even if you had to withdraw monthly to pay it back, it should still be worth it. If for whatever reason things fell apart with this person and you had to give the money back, you could just sell the investments. I would, however, make sure there is some kind of written contract for this loan.

nereo

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Re: invest money while paying 3% interest?
« Reply #2 on: September 30, 2014, 04:48:29 PM »
Personally, I would jump at an opportunity like this. Even if you had to withdraw monthly to pay it back, it should still be worth it. If for whatever reason things fell apart with this person and you had to give the money back, you could just sell the investments. I would, however, make sure there is some kind of written contract for this loan.
There would be simple contract involved, and we have the upmost respect and trust for this individual.  He considers this part of his 'living legacy' to offer financial assistance to his family.
Thanks for your feedback Logan.

I've been trying to run scenarios on different historical outcomes but it's difficult since FireCalc adjusts for inflation (the loan payments wouldn't be adjusted, which is one great advantage I see to doing this).  The best I've been able to do is look at the max/min historical returns over 20 and 30 year periods.

RichMoose

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Re: invest money while paying 3% interest?
« Reply #3 on: September 30, 2014, 05:20:20 PM »
Seems like a fantastic opportunity! It's almost a guarantee that you will have higher than 3% return on stocks over 30 years, should be more like 8%-10%. Hell, there's a decent chance that inflation will be higher than 3% for a portion of the next 30 years. It's virtually free money. If you can make the payments out of your regular budget (not needing to sell your investments) then go for it.

I wouldn't get to hung up on FIREcalc. We know that the Dow returned between 2.6% and 18% over any 20 year period since 1900 with an average rolling 20 year return of ~10%. While there's an ever so slim chance that your 30 year return would be less than 3%, I wouldn't let that hold me back.   

MikeBear

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Re: invest money while paying 3% interest?
« Reply #4 on: September 30, 2014, 07:01:46 PM »
I would NEVER 'borrow' money from a family member, except under extreme duress or need (think medical, life or death case).

It never ends up well, and is a poor way to start a married life. It just has a way of causing hard feelings all the way around.

The odds are very much against this opportunity you have being any different.
« Last Edit: September 30, 2014, 07:03:29 PM by MikeBear »

nereo

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Re: invest money while paying 3% interest?
« Reply #5 on: September 30, 2014, 07:13:08 PM »
I would NEVER 'borrow' money from a family member, except under extreme duress or need (think medical, life or death case).

It never ends up well, and is a poor way to start a married life. It just has a way of causing hard feelings all the way around.

The odds are very much against this opportunity you have being any different.
Fair enough.  But for the sake of discussion, would you opinion differ if it wasn't a family member?  Would you take out $50k @ 3% and invest it if your bank allowed you to do so?

MikeBear

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Re: invest money while paying 3% interest?
« Reply #6 on: September 30, 2014, 07:18:22 PM »
I would NEVER 'borrow' money from a family member, except under extreme duress or need (think medical, life or death case).

It never ends up well, and is a poor way to start a married life. It just has a way of causing hard feelings all the way around.

The odds are very much against this opportunity you have being any different.
Fair enough.  But for the sake of discussion, would you opinion differ if it wasn't a family member?  Would you take out $50k @ 3% and invest it if your bank allowed you to do so?

Yes I might do that. In fact, I have a $80k HELOC that's 3% and my house is paid off. I already used $50k of it on a contract and am bringing in 8% for 5 years, that has a 5 year balloon that's now due in two years (August 2016). The people paying have never missed a monthly payment for 3 years now.

nereo

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Re: invest money while paying 3% interest?
« Reply #7 on: October 01, 2014, 07:06:35 AM »

Yes I might do that. In fact, I have a $80k HELOC that's 3% and my house is paid off. I already used $50k of it on a contract and am bringing in 8% for 5 years, that has a 5 year balloon that's now due in two years (August 2016). The people paying have never missed a monthly payment for 3 years now.
ok, thanks.  The reason I want to take 'borrowing from family' out of the equation is that its a bit different than 'uncle-joe' writing a check from his savings account.  Yes he is family, but this is also what he does in his semi-retirement.  He was an investment banker, made a killing and then 'retired' to run his own 'wealth generation fund' (whatever that is).  Basically now he provides equity for individuals and small groups within the community that the banks wouldn't offer loans to, because in his words "that's how a community grows... but the banks won't touch it, because there's nothing in it for them."    Recently he's offered an interest-free loan to our community pool so they could update the filter system, he helped the youth soccer league create new playing fields when a developer bought (and built houses on) the old soccer fields, and he's given loans like this to a half dozen family members and friends (that I know of) so they could go to college, have the downpayment on a home, buy the equipment and rent space for their osteopathy practice, etc.

i'm posting here becasue i have economic questions about whether this is a smart thing to do. We had a moral question about whether taking the money from him was right (given that he could use it elsewere) but we explained what we would do he just laughed and half joked that we would be his "lowest risk loan yet."