Using personal loans to get a foot in the door

Discussion in 'Share Investing Strategies, Theories & Education' started by Mark Laszczuk, 5th Oct, 2005.

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  1. TryHard

    TryHard Well-Known Member

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    $100k?

    Apologies in advance if I missed the point, but don't you have to figure in the borrowing or opportunity cost of the $100K "investment required" figure. eg. if its from the LOC as 7% is that not another $7K added to annual costs ?

    I guess the interest on the extra $100K would be bearable when you're sitting in a Ferrari ... (how many people young enough to exploit what a Ferrari could 'provide', actually have one I wonder ! :) )

    Cheers
    Carl
     
  2. Steve Navra

    Steve Navra Well-Known Member

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    Hi Carl,

    Don't buy a car with borrowed money!! (Unless it is deductibel of course)

    However, if you have borrowed the money from your LOC (For shares, which would be deductible), then yes you must take the $7K cost into account.

    Regards,
    Steve

    PS: Only old grey haired men drive Ferraris :rolleyes:
     
  3. kennethkohsg

    kennethkohsg Well-Known Member

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    **************************************
    Dear Mark,

    1. As far as property investing game is concerned, I will prefer to invest safely i.e start 'small' first and IF I have to wait, I will prefer to wait till I am more ready to invest, both financially speaking, mentally speaking as well as based on my own level of investment education acheived to date.

    2. As far as stock investing is concerned, I won't even want to consider the "start small with a margin" option at all, which you are proposing.

    3. As I understand from and agree with Robert Kiyosaki, "money for stock investments" is known as "game chips" and since we do not really have the "chips", techncially speaking and realistically speaking, we cannot truly AFFORD to play this game at all, as we are not TRULY READY at this point time yet.

    4. To me, to try to win in the stock investing game, we need to have this Mentality, capable of doing real-time market monitoring ourselves, always thinking and acting fast and decisively amid a very uncertain scenario situation and to able to objectively and comfortably write off the invested monies losses where neccessary, without a single blink of our eyes or any taint on our own emotions. If the invested monies should come back to us, it is deemed as a surprise bonus.

    5. With this kind of Mentality and game perspective, we will have no problem acting calmly and at our own pace with a very cool head so as to be able to reads the market situation accurately on a real time basis and act rationally. This will allow us to beat the stock investing game at its own rules of uncertainity and non-predictability, and fast-moving market nature.

    4. For your kind update, please.

    5. Thank you.

    regards,
    Kenneth KOH
     
    Last edited by a moderator: 30th Oct, 2005
  4. TechMan

    TechMan Well-Known Member

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    I asked my accountant about the FBT as from my reading of the ATO literature it did seem like you have to pay it when following this approach, and he mentioned that if you say that 90% of the car is for business and that 10% is for personal use then FBT does not apply as you are paying for part of it. Is this true? The disadvantage is that you can only claim 90% of all the operating expenses.

    With this approach you save $17,000 in tax liability on the $40,000 car example if your in the 48.5% tax bracket, if i understand it correctly. How much capital could you take out from the company each month?

    With Steve's other approach of investing and using the income to pay off for the car, i dont understand one bit.

    I thought CG was incorporated into the income distributed from the fund, so doesnt the benchmark 10% pa income frome the fund already include CG?
     
  5. artgul

    artgul Well-Known Member

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    My understanding is that besides the quarterly distributions (around 10% pa), we also have between 4%-5% CG pa. That's why capitalising the interest of the margin loan is not an issue.

    Rgds,
    artgul
     
  6. TechMan

    TechMan Well-Known Member

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    Is this reflected in the unit price and only realised when you sell the units?
     
  7. artgul

    artgul Well-Known Member

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    That's my understanding.
     
  8. Steve Navra

    Steve Navra Well-Known Member

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    CORRECT :)
     
  9. TechMan

    TechMan Well-Known Member

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    Thanks artgul and Steve for your replies.

    So Steve and others, what about a hybrid approach if you are a business owner and have the cash personally available to buy the car but not more, however want the best structure.

    Instead of buying the car with your own personal cash and noting a loan on the business accounts. What about this approach: Obtain finance (Hire Purchase) with an interest cost around 8% pa (deductible) for a term of say 3 years. And place the personal cash you were going to buy the car with into the Navra fund utilising a margin loan.

    Example

    Cost of vehicle: $40,000
    Lease / hp cost at 8% = 1253.45 per month.
    Total Interest: $ 5124.37 (deductible)

    Buy MF with 50% margin loan.

    Therefore: Managed Fund of $80,000 with loan of <$40,000>

    Income at 10% pa = $8,000 less margin loan of $3,200 = $4,800 = $400 per month. (taxed)

    CG at 5% p.a. = $92,610 after 36 months. ($12,610 gain)

    With this approach your personal money is never actually tied up to the car. The CG + income outstrip the finance costs. You obtain deductions for your business (Interest costs) and you dont need more money than what the car would actually cost you personally.

    Have i missed anything??
     
  10. TechMan

    TechMan Well-Known Member

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    No takers?

    I have mocked up a simple excel spreadsheet to illustrate the situation better, but with a cheaper car.

    The scenario. You own a business and have the cash personally available to purchase a car. However, instead of purchasing the car outright you organise a Commercial Hire Purchase and invest the money you were going to use for the car in the navra fund with a margin loan.

    To keep things simple, every year after you receive income you pay off the interest from the ML and set aside money which will need to be paid in tax for the extra income. What remains is reinvested back into the fund and the ML is topped up by the same amount.

    At the end of the Commericial Hire Purchase, the units in the Navra Fund are sold and the ML paid back. The column Total Gain should reflect the outcome of this scenario.

    Obviously, the distribution rate, personal tax rate and ML rate affect this outcome.

    Let me know what you think, or if anyone spots errors in my workings.

    Cheers :)
     

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