Adding Debt To Increase My Assets

By: ispeculatornew
Date posted: 01.29.2013 (3:00 am) | Write a Comment  (5 Comments)

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borrowA few months ago, my wife and I met a financial planner that went over all of our financial things. Our assets, debts, income, spending, taxes, insurance policies, will, and a lot more. His goal was then to go over it all and come up with a few specific recommendations. I expected to be sold on a few different products, probably around life and disability insurance. It did happen to some extent but one of his main suggestions was something that I did not expect.

-borrowing to buy solid investments

Why? Basically, because we are young, have decent level of assets, no debt except for our mortgage.  Add to that the fact that we are capable and willing to take on more risk, do understand the benefits and possible downsides of making such a move, etc. Basically, any money that we can save is currently going into our tax-free retirement accounts but once that’s done, there are 2 main choices:

-increase the speed at which we pay our mortgage
-save money in non-taxable accounts

Since we are paying very little interest on our mortgage, the thinking is fairly simple. Over long periods of time, the odds are that we can generate more money through our assets than whatever we’d be saving if we were paying our mortgage.  It’s fairly straightforward and I certainly know that in theory this is something that makes a lot of sense.

Why Didn’t I Think About This Myself?

You’d think that with all of my financial education, my CFA title and everything else, I could have gotten to this conclusion myself. I guess this is proof that it’s always useful to see someone who is more “impartial”. I’m still not a huge fan of leverage but I do think that to some extent, it makes a lot of sense to increase my leverage.

The tax perspective also makes this more attractive because any money that I end up paying in interests in borrowing to fund investments is tax deductible.

How Much Debt To Take On?

I’m seriously considering adding some debt, but how much? I’ll probably use a ratio of debt to assets.

For example, if I currently own $500K in assets and $200K in debts and am willing to have a 50% ratio, I’d be able to borrow $100K to invest in the markets (or other passive income generating methods). Why? Because I would then have $600K in assets and $300K in debts (300/600 = 50%).

Have You Considered Doing This?

If you are paying 3% on a mortgage and need to generate less than 2% (because of taxes impacts) to breakeven, do you think it’s a no-brainer to keep some level of debts?

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  1. Comment by Robert Zaleski — January 29, 2013 @ 1:12 pm

    I haven’t…. Cash-flow wise it is another commitment, and I’d like to get/keep those down to the minimum. I always seem to have a car loan though we pay them off quickly and have only bought 3 cars, 2 of which were certainly necessary, and hopefully we’re done. Though a 8 -> 12 passenger van upgrade might be in the works soon.

    But I do think I’ll look for a higher rate of return over the mortgage and consolidated student loan. My income hasn’t hit the point where it’s an issue. 16 K + 10K in retirement accounts for most married couples is a big chunk. After that I imagine I’ll just build up the taxable investment account since the way I invest is pretty agnostic to market timing for cashing out in emergencies.

    Whether or not I could take on 100K loan and make more money than interest is the thing…. I don’t think I’d be comfortable with a guaranteed monthly payback versus a possible return unless I was 90% sure I could make that return. And at this point I’m not convinced I can reliably beat 5-6%. So it depends on the investment I guess.

    I did read about a couple who would take 0% introductory cards, max them out, use it to buy CDs, and then pay the amount back in full the month before the 0% expired. It was risk-free, free money to them. You’re looking at the same thing. But the return might not be 100% guaranteed.

  2. Comment by IS — January 30, 2013 @ 4:52 am

    @Robert – Certainly very interesting an I absolutely see where you’re coming from with this. As for using 0% cards and all, just seems like a lot of work and I don’t think I’d want to spend time always hunting for the next one, especially for a limited amount. I’m much more interested in a longer term strategy

  3. Comment by Mat — January 31, 2013 @ 2:50 pm

    I agree with everything you are saying. My only question on this is. What % are you borrowing 100k at? I assume its around 6% to 7%. Is it worth investing the 100k with paying that much? Just thinking, I am in the same boat and have thought about doing something like this. Just didn’t know at what point does it not make sense.

  4. Comment by IS — January 31, 2013 @ 8:38 pm

    @Mat – I guess that answer would take a while to explain but basically, I am able to take out 100K from my house (that I’ve already paid down) which will go to my mortgage, at a 3% rate or so.

  5. Comment by Mat — February 1, 2013 @ 12:20 pm

    @IS – That makes sense. I thought you were talking about borrowing from a bank. I do agree with you, if you can refinance at 3% and do a cash out, you can really get some things going with stocks.

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