Borrowing to Invest – Part 3 of 3

In part one of this three-part series we introduced the topic and ways to borrow to invest. In part two we outlined some of the key considerations when borrowing to invest, and now in part three we will cover some specifics on how to put this powerful strategy to work in real life. In other words, let’s move from theory to practice to help you grow your net worth!

Putting this strategy to work means tackling 2 key decisions:
1. How you’ll borrow
2. How you’ll invest

Deciding How to Borrow to Invest

In deciding how to borrow to invest you’ll have a couple of key considerations. Going back to part 1, will you use a mortgage loan, home equity line of credit, instalment loan, term loan, or demand loan? For most borrowers with home equity the mortgage and/or line of credit provides the lowest cost of borrowing and greatest opportunity to earn a spread between that cost of borrowing and their investment income.

Even narrowing down your borrowing selection to either a mortgage or line of credit there is plenty to consider. A qualified mortgage professional familiar with the borrowing to invest strategy will be your best source of specific product knowledge. They’ll be able to help you choose the right product after helping you to determine the answers to questions such as:

– How much more equity can you get access to?
– How much of that equity are you comfortable investing right away?
– How much of that would you prefer to invest over the next few weeks, months, years?
– Which components will be tax deductible vs. non-tax deductible?
– What is your after-tax cost of borrowing on each of those components?

These questions may seem daunting when you are not familiar with lending for a borrowing to invest strategy, but when you work with this strategy on a daily basis the way our team does these things become second nature and we’re here to help you make smart financial decisions and choose a product that will work best for you.

Deciding How to Invest What You Borrow

Usually determining how much you can borrow and at what cost is the first step. Once you’re armed with access to capital your next step is to determine how you’ll invest that for an after-tax rate of return greater than your after-tax cost of borrowing.

In determining the right home for your investable funds you’ll want to work with a trustworthy professional who will take your financial goals into consideration and make recommendations suitable to you as a client. You will want someone who can help you with the following:

– Understanding your general financial situation and standing
– Understanding appropriate asset allocation within your portfolio based on your own risk tolerance and time horizon
– Understanding the type of borrowing you’ll use to fund the investments and the tax implications of the borrowing and investment income/appreciation
– Understanding the tax-deductibility of transaction costs

Again this may seem like a lot to understand but the role of a good financial professional is to ensure you make informed financial decisions which are aligned with your financial goals.

The Bottom Line

To summarize on our 3 part series here are your key takeaways:

1.Borrowing to invest carries risk to the borrower because you are using leverage (this magnifies your gains, but also your losses)
2.You should understand your borrowing structure, cost of borrowing, and after-tax cost of borrowing to make good borrowing to invest decisions
3. You must understand both the pros and cons of this strategy
4. You should consult a mortgage professional, tax accountant and financial advisor to help you with these important decisions

Our team handles the mortgage financing on tens of millions of dollars of borrowing to invest transactions every year (quite literally hundreds of transactions every year). Each member of our team in an advisory role has formal personal finance training and an in-depth understanding of the borrowing to invest strategy. We are uniquely suited to assisting you with optimal debt structuring and setting up your access to capital for your personal borrowing to invest strategy.

Call our team at 1-855-410-9905 / 416-410-9905 or email clientcare@calumross.com – we would love to help you reach your financial goals sooner!

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