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View Full Version : leveraged investing.. good or bad?



TimG
07-29-2006, 11:35 PM
So I was talking with a CFP today and she was touting this Leveraged Investing concept.

I just wanted to ping some of the investing gurus here about their opinions on this strategy.

Basically, you get a loan for some value, say 50k, and it gets invested into whatever funds your FP recommends. you get cash interest payments every month which should be as much or more than the interest you have to pay on the loan.

all of the interest payments you make are tax deductable, and only 50% of the remaining interest that you pocket is considered as taxable income.

After x years when you cash your investment, you pay back the back the initial loan of 50k and pocket the extra.

AND the loan won't appear on your credit report.

Thoughts? Opinoins?

lint
07-30-2006, 12:43 AM
yes it is good, many people use it. "Other people's money".

Why do you think it's a bad idea?

djayz
07-30-2006, 12:47 AM
its a great way to leverage your growth but you also need to get a certain percentage return on your investment to break even.

Also at any given time you go into a negative return the loss is also leveraged.

also looks for funds that have a low turnover rate so you dont get taxed on capital gains.

also you must invest all of the money borrowed otherwise the interest will not be tax deductible.

Celica TVS3
07-30-2006, 12:50 AM
Well it's not ALWAYS good. If your investments don't meet your expected rate of return or even fall in value then you're on the hook for the interest/principal you borrowed.

max_boost
07-30-2006, 12:59 AM
Good if you are making money.
Bad if you are losing money.

Just that simple :D

Here's a scenario.

1996 Invest $50k into the RBC Dividend fund
This fund has yielded on average 14.XX% over the last 10 years.

2006 it is worth $190k
After taxes you pocket around $110k. Not bad at all.

TimG
07-30-2006, 08:11 AM
Everything about it sounds almost too good - except the part that if your investment goes down the toilet you're on the hook for the borrowed amount.

djayz: what do you mean by "Also at any given time you go into a negative return the loss is also leveraged."

djayz
07-30-2006, 07:12 PM
what i meant was that if your return yields negative the loss is leveraged as well so youll lose more than if you didnt borrow money.

also its good to have backup money to pay for the loan for up to a year if things go sour at any point.

There is a lot to consider before doing this so talk to your investment advisor and go over some senarios.

another thing is if you borrow say 2:1 ratio so say you put in 50k of your own money and borrow 100k your returns are more than if you borrowed 1:1 ratio.

also when upvesting which is what this is called invest for the long term. 10 years is a good minimum.

2.2vtec
07-30-2006, 11:41 PM
and how will it not show on your credit report? Everytime you apply for any credit product it will show.

Xtrema
07-31-2006, 12:46 AM
Originally posted by TimG
Basically, you get a loan for some value, say 50k, and it gets invested into whatever funds your FP recommends. you get cash interest payments every month which should be as much or more than the interest you have to pay on the loan.


Sounds fine except the part underlined.

How trusted is your FP? Some will push for products that's risky for a higher commission So watch out.

The whole idea is get rich on someone else's money. It worked fine last few years but becoming risky as interest rate raises.

An exmaple of this is ATB will lend you @ prime-1% if you buy their fund products.

ShOwOfF
07-31-2006, 01:25 AM
^^It is illegal for FP's or anybody who is certified to sell securities to place you in anything that is over and above your investment objectives. Although he or she would likely get more for placing you in an equity fund then a mmkt fund, he/she would lose her license if your allocation of wealth doesn't meet your objectives. Ultimately you choose which funds you're in, the FP and IA's just guide you in the right direction.

TrevorK
07-31-2006, 11:23 AM
Originally posted by TimG
all of the interest payments you make are tax deductable, and only 50% of the remaining interest that you pocket is considered as taxable income.


This is the part that you may be mistaken about.

When you have investments, there are generally three types of income they can generate (And a single mutual fund could technically create all three):
- Interest Income
- Dividend Income
- Capital Gains Income

Interest income is taxed at 100% - so if you make $50,000 interest income, then $50,000 is added right onto your yearly total income.

Capital Gains income is taxed at 50% - so if you make $50,000 capital gains income, then $25,000 is added right onto your yearly income.

(Dividends are different, and I won't get into those with all the rebates).


With mutual funds, most that have distributions (So a return of your investment) are using interest income. In fact, I'm sure of any (Outside of corporate class funds, which have no distributions) that return 100% capital gains income.

TimG
07-31-2006, 11:40 AM
From what the FP told me, the interest made on the investment was only taxed at 50%. I *think* it was classified as dividend income. i'm not 100% certain, tho.

But the interest payments you make to re-pay the loan are still tax deductible, right?

lint
07-31-2006, 11:52 AM
Originally posted by TimG
But the interest payments you make to re-pay the loan are still tax deductible, right?

The amount depends on your marginal tax bracket. ie if you pay 40% tax, then 40% of your investment interest is tax deductible.

TrevorK
07-31-2006, 02:43 PM
Originally posted by TimG
From what the FP told me, the interest made on the investment was only taxed at 50%. I *think* it was classified as dividend income. i'm not 100% certain, tho.

But the interest payments you make to re-pay the loan are still tax deductible, right?

Correct, the interest you pay for the investment loan is completely tax deductable.

So if you had a $10,000 interest bill and your income is $75,000, at the end of the year your taxable income would be $65,000 (Plus you'll have to add whatever income you earn on top of that).