# Things to have before borrowing to invest



## MrMike (Sep 30, 2020)

Hello, I'm wondering what should a person already have before it's a good idea to borrow to invest?

Off the top of my head, I'm thinking:

emotional stability to handle the natural ups and downs of the market
able to get a low interest rate
able to pay interest if dividends for a single month can't cover that interests

Can you think of any other? Thanks


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## james4beach (Nov 15, 2012)

More than 10 years of investing experience


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## spiritwalker2222 (Nov 7, 2017)

Know the down side of leveraged investments.

Do you plan to buying and hold, day trading...

Edit, fixed type.


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## MK7GTI (Mar 4, 2019)

Sea legs and a rock solid stomach.


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## MrMike (Sep 30, 2020)

spiritwalker2222 said:


> Know the down side of levered investments.
> 
> Do you plan to buying and hold, day trading...


buy and hold


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## james4beach (Nov 15, 2012)

MrMike said:


> buy and hold


Curious, have you invested through a bear market before? They can be pretty scary, and can erode one's confidence. The only significant ones in recent times were 2001-2003 and 2008-2009


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## MrMike (Sep 30, 2020)

james4beach said:


> Curious, have you invested through a bear market before? They can be pretty scary, and can erode one's confidence. The only significant ones in recent times were 2001-2003 and 2008-2009


If you count March 2020-present, then yes  if you mean 2008, then no. I've been investing for 3 years.


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## Thal81 (Sep 5, 2017)

It's never a good idea to borrow to invest. It looks like a good way to boost your gains, but the downside can be devastating. Use your own money and you will never owe anyone anything.


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## james4beach (Nov 15, 2012)

MrMike said:


> If you count March 2020-present, then yes  if you mean 2008, then no. I've been investing for 3 years.


I would just add the warning that the March crash was very brief. This can give an unrealistic idea of how easy it is to invest through bear markets. Sometimes, the market can stay down for much longer.

When markets fall and stay down for a long time, it can be very difficult to handle emotionally. It's really hard to convey the "feeling" that comes along with this kind of thing.


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## :) lonewolf (Feb 9, 2020)

MrMike said:


> Hello, I'm wondering what should a person already have before it's a good idea to borrow to invest?
> 
> Off the top of my head, I'm thinking:
> 
> ...


Need a method that gives you an edge that fits your personality
Need to follow your method 
The ability to accept huge gains

Instead of borrowing to invest just use a leveraged ETF


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## :) lonewolf (Feb 9, 2020)

From this years March low to today close the QQQ was up 68% from 164 to 277 @ todays close
The 3x leveraged QQQ ETF TQQQ was up 765% from the this years March low 32 to 130 @ todays close

If you see a strong up trend that is going to last for a while it is best to Invest how Einstein would invest use compounding i.e., a leveraged ETF though do not use them to play the upside in a bear market.

Einstein said those that understand compound interest make it. Those that do not understand compound interest pay it. Paraphrased


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## Rusty O'Toole (Feb 1, 2012)

If you are talking about borrowing on a mortgage to buy real estate I could offer some advice. Other than that, borrowing to invest is a bad idea.


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## MrMike (Sep 30, 2020)

Rusty O'Toole said:


> If you are talking about borrowing on a mortgage to buy real estate I could offer some advice. Other than that, borrowing to invest is a bad idea.


Why do you say that? what's the difference in buying a house and the risk of not rending it out vs investing in stocks and risk dividends being cut? both have risks. why are you prioritizing one over the other?


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## Eclectic12 (Oct 20, 2010)

I'm curious about why some see it as bad or never a good idea instead of YMMV where risks have to be managed. Same as investing in general, just more moving parts.

In my case, the track record is 4x to 8x the interest costs in dividend income per year. The income plus some pruning of the investments meant maxing out the mortgage pre-payments, paying it off years ahead of schedule.


AFAICT - there's nothing written in stone that per-determines that's it is good/bad/mediocre for everyone. One can figure out if it fits oneself or that the current numbers/risk don't work but IMO, the broader scope is YMMV. Again, like investing where some of my family are disasters at DIY, some are good.


Cheers


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## Mortgage u/w (Feb 6, 2014)

I never liked the idea of borrowing to invest. For me, its just another scheme that benefits the lender more than the borrower. No one made a fortune using this method......but everyone did by investing the money they earned.

Same principal applies here as the old saying, "don't spend what you don't have".


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## MrMike (Sep 30, 2020)

Mortgage u/w said:


> No one made a fortune using this method


I'm not looking to make a fortune; Id be very happy if I can increase the amount of money I have in investments by $300,000. I'm 39 so if I can get $300K for free (borrowing and paid off) then I would put that in the win column.


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## Eclectic12 (Oct 20, 2010)

Mortgage u/w said:


> I never liked the idea of borrowing to invest. For me, its just another scheme that benefits the lender more than the borrower ...


Sounds like this is more of a temperamental thing than an objective one ... like my dad insisting on only deposit accounts and GICs with zero equity for decades.



Mortgage u/w said:


> ... No one made a fortune using this method......but everyone did by investing the money they earned.


It's that cut and dried?

All this talk about ETFs being more efficient as individual investors don't do well must be overblown hype when everyone investing money they earned makes a fortune, right?

Odd that there are investors profiled in newspaper articles who say they turned $100K into $22K of their hard earned money before they smartened up to have someone manage their invests through a person, a MF or an ETF. They also should not be borrowing to invest but using their own money didn't guarantee a fortune to them, AFAICT.


In my case, I'm sure I wouldn't have committed that much of my own money so the income was higher than I would have had, there was a tax deduction I would not have had and certainly after the mortgage was paid of, I was investing more from the freed up cash flow than had the mortgage kept running. Maybe not a fortune but definitely worth doing.

Cheers


*PS*
I haven't dug into the details but IIRC, there's a study that says Buffet's results are a combination of his choices and leverage (i.e. borrowing to invest).


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## Rusty O'Toole (Feb 1, 2012)

MrMike said:


> Why do you say that? what's the difference in buying a house and the risk of not rending it out vs investing in stocks and risk dividends being cut? both have risks. why are you prioritizing one over the other?


They don't publish the price of your house in the paper every day. People buy houses with mortgages all the time and keep them for 5, 10 or 20 years. If you hold the same property for 10 years you are practically guaranteed to make money, I don't think there has been a 10 year period in this country when real estate did not go up.
On the other hand stocks go up and down all the time. I hate to see mine go down even though I own them outright. It would drive me nuts to have to make payments on a loan, after the money was lost on a bum stock investment. What if you had bought IBM, Kodak, Xerox, Nortel, or any of a hundred stocks that were once investment darlings only to see them go to 0?
I owned rental real estate for 40 years and it is a tough business at times, but the chance of losing money is vanishingly small if you have some common sense and are willing to do the work. The stock market is way easier - I wish I had gotten wise to it 50 years ago - but it is also way riskier.
The big advantage of real estate is leverage. If you only have a small amount of money to work with, you can use it as a down payment and borrow up to 10 or 20 times your down payment. Do the math. If you put $10,000 down on a $100,000 property and it goes up 10% you just made $10,000 - which is a 100% return on your cash investment. I have done this many times.
So, I recommend you learn stock investing but don't go into it with borrowed money. You are almost certain to lose at first. I know I did, and so do most people. It hurts bad enough to lose a small amount of savings. But you can save up another stake and get back in the game. I don't know what you do if you borrow a lot of money and lose it. 
There are some crazy examples on Wall Street Bets of guys who leveraged up or used borrowed money to speculate and lost, in some cases, hundreds of thousands of dollars and then killed themselves.
Especially at first, the stock market is an emotional roller coaster. You have to get used to it and learn to leave your emotions out of it and make logical decisions. This means paper trading and trading small at first, so small it hardly seems worth the bother. With practice you get better and can increase your commitments but starting off with borrowed money is a bad idea.


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## Eclectic12 (Oct 20, 2010)

Many good points where I agree that one should have experience and a plan they trust before borrowing to invest.

As for a ten year period where RE did not go up, local issues can be masked if one is looking at the country wide stats. IIRC, Toronto RE took from about 1989 to about 2001 for the drop in prices to climb back to the previous highs from the 25% or so drop. I don't really pay attention to RE so there may be other examples.

For buying Nortel and watching it go to zero, I'm not sure using one's own money provides much comfort versus if it was leveraged. Which also raises the point that one's investing plan, especially for the leveraged part has to monitor the companies plus be willing/able to pull the trigger to sell if things are going badly.

It is ironic that you mention Nortel as that was a missed leverage opportunity for me. For the equity I controlled, I suppose I should not be too upset about buying for $3 then selling for two thirds for $11 and the rest for $8. Leverage would have been a nice multiplier.


I suspect for IBM you mean more like "bought at highs it hasn't returned to". I don't recall IBM going to zero plus can find no reference to this.


Cheers


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## james4beach (Nov 15, 2012)

I think leverage can work for some people. There was a lawyer on this board who posted about his interesting in leveraging up, and I was encouraging him to do so... it seemed like a sensible thing in his case.

But my reasoning for that was that he already had investing experience, seemed comfortable with risk, and made so much income that he could afford to "blow up" and lose everything, perhaps in a sharp drawdown & wipeout. So he can afford to get wiped out.

(Wipe-out can happen if you get a large drawdown that most people do not expect, perhaps a 70% collapse in market, plus the leverage effect which will push you towards 100% loss, at which point nearly every human panics and locks in losses, or is forced to by margin calls of one form or another).

Most people usually capitulate much earlier than that, actually.

I can't afford to get wiped out. Most people can't. But someone with a high income, or maybe with a big pension, probably can afford to take that chance.


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## MrMike (Sep 30, 2020)

Thank you everyone for the discussion. I'm actually asking because I want to document my journey of borrowing money to invest; to show my kids when they're older and for anyone else who can learn from my experience, good or bad.

I'm 2 months into my investing with leverage journey with 2 Youtube videos. I wanted to address the risks of what I've done in my 3rd video. 

One more thing, I hear A LOT that I wont get rich off borrowing money but my goal isn't to get rich. Even if I come out of this in an ideal situation, I'm OK with making 100K - that's still a lot of money that I didn't actively had to work for. And with this series I'm making, despite my bad memory, they'll be able to learn (and benefit from any money I do make) and hopefully make more money than me.


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## Eclectic12 (Oct 20, 2010)

james4beach said:


> I think leverage can work for some people ...


For me, it's a tool in the toolbox. And like other tools, using it properly works and abusing it causes problems.




james4beach said:


> ... I can't afford to get wiped out. Most people can't. But someone with a high income, or maybe with a big pension, probably can afford to take that chance.


Meh ... you write as if the only choice for leverage use is to bet the farm, with only a big win or a big loss as the results. 
Knowing I could deal with repaying the cow pasture - that's what I leveraged.

Definitely more boring than a big time roller but profitable for me.


Cheers


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## MrMike (Sep 30, 2020)

Thank you all for your advice on this topic. Thanks again.


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## MrMike (Sep 30, 2020)

I wanted to give everyone an update on this. *As of today, my house makes us $1,193/month*.

*Summary*

Principal: $267,500
Market Value: $340,252
Gains: $72,752 or 27.20% ↑
Dividends/Month: $1,734
Bank Interest: -$541 (on $240K)
Net Dividends: $1,193
Come on $7 more dollars


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## Covariance (Oct 20, 2020)

MrMike said:


> I wanted to give everyone an update on this. *As of today, my house makes us $1,193/month*.
> 
> *Summary*
> 
> ...


MrMike; congrats on your project. Am I correct in calculating your dividend income (before interest expense) as around 8%/annum?


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## MrMike (Sep 30, 2020)

Covariance said:


> MrMike; congrats on your project. Am I correct in calculating your dividend income (before interest expense) as around 8%/annum?


thank you very much - so far so good avg 7.78% yield, yes


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