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Using personal loans to get a foot in the door

Discussion in 'Investing Strategies' started by Mark Laszczuk, 5th Oct, 2005.

  1. Mark Laszczuk

    Mark Laszczuk Well-Known Member

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    Wanna throw this out to everyone. What do you all think about using a personal loan with margin loan to get yourself up and running? YES, the risks are higher (the interest rate on a personal loan is quite substantial). But do y'all think it's better to take a risk on a personal loan with margin (say 20K PL with 20K margin) or start 'small' with a margin (1K own savings and 2K margin with regular monthly deposits)?

    Please, I'm not looking for 'this is a very risky strategy' type answers. I want to know from people whether they would or wouldn't do this and why they personally would or wouldn't do it. I am very well aware of the risks involved, just want to get some other people's views.

    Mark
     
  2. Simon

    Simon Well-Known Member

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    For what it is worth as a young fellow I used to borrow sums of $5000 from my Credit Union and buy a selected blue chip.

    The interest was deductible.

    The reason I did so was that I had much more discipline paying down a loan than I did saving $5000. I was doing it twice a year until I finally found out about LE and never looked back.

    Wish I had known that I could have geared it up a notch back then.

    Funny thing was my peers thought I was crazy borrowing to buy shares... "What if they go down".

    I explained that they borrow for cars and they were guaranteed to go down!

    Cheers,
     
  3. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    I base my calculations on an expectation of 10% returns from a fund like NavraInvest ... many people would still consider that optimistic - I think it is achievable on average.

    This means for your leveraged investment to be effective, you need to allow enough buffer between the cost of borrowing and the returns you get.

    The buffer required to make it worthwhile also depends on whether you invest your own capital or leverage up to 100% using equity or additional debt.

    On an 8.5% margin loan, that only allows you a 1.5% buffer - not terribly much, and questionable whether it is worth the risk. Depends on how bullish you are about the fund (or other investment).

    A personal loan will generally be at least 10%, usually a lot more. If your fund is going to be returning only 10% on average, a personal loan is not a good idea in my opinion - even for only part of the capital.

    If you were confident that the fund could return 20% per annum, it's a different proposition ... but you'd be taking a rather large risk in my opinion - too large for my liking.

    Where I have seen people employ finance like personal loans and credit cards is when there is a "deal of a lifetime" (you know, the ones that come around every couple of weeks ? :D ) ... where you know you're going to make instant returns or equity on the deal - you just need some cash to get in. Usually this would be on something like a real estate deal rather than an investment in a share fund.

    Given that many margin lenders insist on a $20K minimum lend, I would suggest that until someone has $15K of their own capital to invest, it wouldn't be worth considering margin loans anyway.

    If someone has trouble getting even $15K together I personally don't think they are liquid enough to be playing with these types of loans anyway. I would suggest to start with their own capital and a regular savings plan into a managed fund - until they have $15K there, then borrow $20K using a margin loan for an additional investment and continue from there.
     
  4. Mark Laszczuk

    Mark Laszczuk Well-Known Member

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    Thanks for that fella's, very much appreciated.

    Mark
     
  5. Glebe

    Glebe Well-Known Member

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    If would question the discipline of the 'investor' if they need a personal loan in the first place. Simon seems to have done well but I think would be the exception rather than the rule.

    But if I was pressed to make a recommendation for someone with seemingly no history of savings, I'd go to infochoice and search on margin loans that don't require a minimum amount:

    http://www.infochoice.com.au/investment/marginlending/selector.asp
     
  6. Nigel Ward

    Nigel Ward Team InvestEd

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    I know this is a bit tangential to the discussion, but has anyone considered this scenario.

    Let's say you have plenty of cash/share/managed funds but you just can't live without that Ferrari/Maserati/Porsche etc.

    Can you have your cake and eat it too?

    Say the car's $350k. Could you:

    1) sell say $375k of shares
    2) use the 75K to pay CGT at 24.5%
    3) buy the car with 50k of your own money plus $300k remaining proceeds of sale
    4) take out a personal loan secured by a bill of sale over the shiny new car
    5) invest the money back into the shares/funds.

    Certainly there are some costs involved...and the interest will be high (but not as high as if it was an unsecured personal loan)...but theoretically that should work and you'd still have most of your money working in the market and the interest would be tax deductible still...

    Of course getting a $300k personal loan may be another issue :D

    Any thoughts on this flight of fancy?
     
  7. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    Why not just have the distributions from your investments pay for the lease costs of a car ? Car leases can be had at a pretty attractive rate these days.
     
  8. Simon

    Simon Well-Known Member

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    Isn't that how Peter Spann bought his?
     
  9. Andrew

    Andrew Active Member

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    I seem to remember a story like that from RK, that when he wanted a Porsche
    he bought a CF+ block of units instead and used the proceeds to make the
    payments.

    andy
     
  10. Steve Navra

    Steve Navra Well-Known Member

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    Buy the car for cash!
    Register the car in your business name
    Increases your loan account by the cost of the vehicle
    All associated costs are deductible in the business name
    Claim the depreciation each year

    Cost to the business = nil
    Business gets the depreciation write off
    No bad debt or interest payments

    Draw capital out of your loan account each month insteed of a salary (NO TAX !! its your own money)

    Vehicle costs 48.5% less :D


    Aaaaah . . . Structure
     
  11. johnnyb

    johnnyb Well-Known Member

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    Very nice Steve. But what about us poor sods who don't own a business :(
     
  12. Steve Navra

    Steve Navra Well-Known Member

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    Cost of vehicle: $40,000
    Lease / hp cost at 9% = $830 per month.

    Investment required = $100,000

    Buy MF with 50% margin loan.

    Therefore: Managed Fund of $200,000 with loan of <$100,000>

    Income at 10% pa = $20,000 less margin loan of $8,000 = $12,000 = $1000 per month.
    Which covers the cost of the car plus insurance.

    CG at 5% p.a. = $255,250 after 60 months. ($55,250 gain)
    Car value after 60 months = $16,072

    $55,250 + $16,072 = $71,322 at the end of 60 months.

    Add the $71,322 to original investment plus 50% margin loan.

    Managed Fund of $342,644 with Margin loan of $171,322.

    Income of $34,644 less cost of margin loan $13,705 = $20,939 = $1,745 per month.

    Buy new car for $80,000!

    5 years later buy new car for $160,000
    5 years later buy brand new Ferrari :D
     
  13. NickM

    NickM Co-founder Staff Member

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    yes but dont forget
    FBT, log books and the luxury car limit which is still at $57K
     
  14. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    NickM !! Are you back, or still posting from your holiday resort ? :D
     
  15. johnnyb

    johnnyb Well-Known Member

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    Ooooh, you're good!
     
  16. Rolf Latham

    Rolf Latham Well-Known Member

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    Different folks, different ways of achieving the same things I suppose.

    ta

    rolf
     
  17. NickM

    NickM Co-founder Staff Member

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    back in town
    back to work on monday
     
  18. Mark Laszczuk

    Mark Laszczuk Well-Known Member

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    Steve,

    You are an absolute champion! Gonna keep that example for use in structure.

    Mark
     
  19. Simon

    Simon Well-Known Member

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    Is there a tax liability on the $1000 per month used for the car?

    Thanks
     
  20. Steve Navra

    Steve Navra Well-Known Member

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    Yes it is income, so it will be taxed as per yor wage.

    Pre-paying the margin loan can help; or capitalising the magin loan interest is another option.

    The best option might be the deductions against an IP plus depreciation to offset the $12k per year. (And of course the leveraged CG you will get on the IP :cool: )

    Regards,
    Steve