What are your thoughts on borrowing money to invest?

No response. Interesting. I will share my experience.

I've noticed that a lot of Stockaholics do it. I discourage it but will admit to having done it.

15 years ago, we had one rental home without a mortgage and one with a very low mortgage. The rest of the houses and commercial property were mortgaged up.

When we sold the mortgage free home, the idea was to retire the tiny mortgage and one big one. Neither mortgages were all that close to their anniversary date.

The money came into my account and I moved it to my investment account to put into a bond fund. A great deal came up on a REIT that I was in love with and I ended up putting 100% of that money into the REIT, plus all of the rest of our free cash. It was a deal of a lifetime, back then.

The house with the tiny mortgage paid itself off, eventually. The other house that was earmarked to be mortgage free still had a mortgage when it was sold several years later.

Most importantly, having zero cash in reserve to shop for investing bargains put us in a mode of maximum saving. We tightened our belt and built that buffer up again. I was still buying bond funds, back then. We set up an auto transfer to our investing account and automated a monthly bond fund purchase that continued until 2011. These days, I don't park cash anywhere. I just leave it cash because of opportunity cost in converting it back to cash and the lack of gain in any sort of short term, no risk, investment.

Suffice to say, our net worth soared over the next few years. It wasn't the same as drawing a loan and pumping the money into stock options but it was money that could have been used to retire debt so it was a conscious decision to remain leveraged.

Again, I discourage it but I would say that everyone, or nearly so, have "pinched in" at some point and gone all-in on an investment of some kind. It is impossible to get big without doing it. I also feel it is important to understand the risk and the down side, should it fail. Stocks can go into a bad position and not bounce back for a decade. Do not take the current bull run for granted.

In our case, buying a REIT that was a strong distributor made us somewhat immune to market dynamics. Even if we ended up in an extreme vacancy situation, we had strong distributions to cover debt service. We were both strong earners back then. I recall calculating that we would have just barely been able to survive with 100% vacancy and no distributions. That's a pretty extreme scenario so it seemed like a reasonable risk but it happens. Our 25 year commercial lease would have been worthless if the company went out of business. When things go apocalyptic, it can take out anyone.

So, I've never heard of anyone making it with a lifetime of leveraged, high risk, behaviors. These risks need to be minimized. I've also never heard someone succeeding in a strong way without going "all-in", at some point.

A wealthy acquaintance of mine once told me a story of how he expanded his network of automobile dealerships. The story basically involves doing whatever was necessary to get the first dealership (read into that what you wish) and then becoming progressively more conservative. Wealthy people pretend to have skated through life but everyone has taken risks and walked over hot coals, at some point. Our job, as investors, is to minimize those times and understand it is not certain the risks will pay off.

 

I have never..

Depends on your definition of investing.
Worst case if your investment venture goes bust or suffers a heavy loss, can you repay the loan comfortably.

I would consider the worst case scenario beforehand.

 

I dont borrow money to invest,take vacations or buy anything I don't want to pay interest on regardless of the low rates. It has to be paid back.

 

There are successful investors in this forum who have borrowed money to invest. I'm not going to scour the forums for posts to quote and I doubt they will step forward but those of us who follow the forums are aware of it.

The idea scares me. Debt has gotten a lot of people into trouble but it has also built some empires. Nobody went from working class to billionaire without leverage, at some point. Nobody.

On the other hand, there are orders of magnitude more hard luck stories of people who traded away a second mortgage than there are stories of people becoming billionaires.

Christmas 2019 was the last office Christmas party I went to. There were 11 staff and 11 spouses. Two of the spouses told me about how much money they were making trading stocks. I'm not aware either knew I have an interest in the stock market, although it wouldn't surprise me if my wife told their wives who told them. Anyway, they corned me and applied an overwhelming dose of self aggrandizement. Within four months, one of them cancelled her retirement to work five more years due to market losses and the other lost their house.

Two points: 1) People bullshit all the time. 2) Leverage can be a sharp knife.

So, I urge caution.

My post was trying to convey the idea that you probably shouldn't do it BUT, almost every business ever started was built on a loan and that is exactly the same as borrowing money to buy a company you want to own. It is not the same as borrowing money to trade.

 

Should be able to delete with edit feature.

Your question, my answer.

You can guarantee the loan has interest. 2% in your case.
Are you guaranteed to make 7% or more with your investment absolutely, positively with no chance of correction,act of war or any other unforseen circumstance?
I can only give advice on what I would do or not do.
Your money your choice, but I would put thought on both sides of the outcome.

 

R1, you and I share the same point of view on this so I hesitate to post anything contrary but....

The REIT we bought in 2005 paid more than the debt service and it didn't stop distributing in 2009, during the financial crisis. It was a calculated risk and I knew it could go bad but I decided not to use the money to pay off existing debt. Instead, I bought the hell out of a REIT that was the core of our portfolio until it was purchased by a larger REIT in 2017.

We made a lot more by using the money to invest, as opposed to paying off debt.

Our LTV was right around 50% at that time, so it's not like we were mortgaged to the hilt. Also, we could have survived, even if the REIT had gone bankrupt and we received $0.00 on the dollar.

I'm not trying to be argumentative at all. I'm trying to not be hypocritical.

 

I put a lot of weight into your opinion, even when we disagree, which isn't often.
I would guess your capital outlay could absorb the risk reward ratio with no adverse effect. As per your post.

My impression is this gentleman is considering borrowing money to invest from scratch or limited.knowledge based on a few of his answers.

 

Okay, first of all, what are the terms of this amount?

 

The length of the heloc, 5 years 30years?
Fixed rate or adjustable?
I realize you are borrowing against your equity.
Originally you asked if we thought if it was a good idea, later you stated you were paying 2%.
Now your saying 2.9%.
It went from borrowing to not borrowing?
Now its fun to you when we ask questions?

I'm beginning to wonder do you even realize that a HELOC is a loan and according to your latest post accrues interest at a rate 2.9% annually. If you venture goes belly up you lose 100k of equity plus compounded interest and depending on the total of remaining equity your lender can modify or foreclose.

In essence you are using your equity as a line of credit to invest and we are just answering questions you asked. We hope you succeed.

 

I agree with the post about "Leverage can be a sharp knife". You have to be careful with borrowing on margin. I personally have to this day not bought on margin. If I did, I would do it and maintain a very tight stop sell order so that I would not lose too much if my trade went against me.

However, borrowing from a bank to make a longer term investment is a different story. I personally did this. I took out a 5 year loan of $30,000 in order to purchase several stocks. I did this knowing that my worst case scenario was that I would have to make payments for 5 years. It would be as if I was buying a $30,000 car that I never got to see or use. That is basically what helped me make the decision to do it. But keep in mind, taking out a loan is just the means to have the money to invest. More importantly, you have to consider which stocks to invest in in order to maximize your potential investment without risking too much in any one stock.

The best advice that I could give anyone is, "Don't put all your eggs in one basket".

I personally would also take 10% of my total investment amount and put it in higher risk higher reward stocks that could potentially quickly return back my entire investment, $30,000 or more. This is how I like to invest. For instance, if your total investment amount is $30,000, you risk 10% ($3,000), by placing it in higher risk areas that can provide greater rewards that can quickly double your portfolio. Then you could potentially witness your portfolio going from $30,000 to $60,000 in very little time. You just have to figure out the right stock to put it in.

A lot of big profitable trades are made from momentum trades, kind of like what is happening right now with HYMCZ. When people hear something positive about a stock, buyers start to pile in. This creates momentum and the price of these stocks tends to rise faster than normal.

If you haven't read the post yet, there is a post that I made to stockaholics about an article that was just posted to seeking alpha about it. Right now there is a fight going on between about 500 investors and the previous company management. If the group of investors get what they want, anyone holding HYMCZ can make more than 50 times their money. It's definitely worth a read! The article recommends that everyone gets just 2,000 because that is enough to return a very large amount of money, up to 95K. Anyways, I hope I was able to help answer your question. Here is the link to the post: https://stockaholics.net/threads/hymcz-hycroft-mining-holding-corp.11627/

 

I borrowed to invest in 2020. The loan is paid off as is another loan i had. The tasty works account is very happy all done by the borrowed money. It was the best move i made financially. It changed my trajectory.

that said!!!! I was scared AF! Luckily i caught a once in a generation near bottom bounce. There was never a day where the investment was red. Had i bought before bottom, it would have been nerve racking!

it was super risky and people tried to talk me out of it. But its all risk vs reward. I would not be likely to do so if i were in my 50s or 60s.

i will also borrow my ass off to buy or build real estate, now that i have ability (thanks to said borrowed investment) and if i see a good deal.

i also toyed with the idea of doing a mortgage refinance to raise money to invest. But chose to get an open line of credit instead. I didnt want my home leveraged against it. It was all about that risk/reward tolerance.

 

1. How much experience do you have buying/selling stocks?
2. What kinds of stocks are you buying? Established older companies, starters, penny stocks?
3. If God Forbids, you lose the entire 100k, what is your plan (AND YOU SHOULD HAVE A PLAN) for repaying the 2nd mortgage?

I hope you succeed, but this is not my first rodeo. I've seen things, man.