The Case for Leveraged Investments: How Miranda Reduced Her Borrowing Costs by Half
When it comes to investing and real estate, many clients who are purchasing property or real estate ask whether they are better off borrowing money from the bank or selling their investments to make these types of purchases.
This is a common dilemma that many investors face when trying to balance their real estate investments with their other investment goals.
We will explore how a client of ours, Miranda, was able to keep her investment portfolio and reduce her borrowing costs by half. We will explain how she leveraged her investment portfolio to create an interest-free loan while pursuing her real estate opportunity.
The Situation
Miranda was looking to buy a property that she could build a new home on while living in her existing home. She asked us whether she was better off borrowing money from the bank to purchase the lot and pay for the construction costs or sell her investments and use the proceeds to cover the cost of the purchase and build.
In other words, she asked, “will I make more money in my investment portfolio than I will pay in interest charges?”
We explained that over a short period of a year or two, it would be difficult to predict that.
We went on to explain that she could keep her investment portfolio and, at the same time, reduce her borrowing costs by half. In other words, she could “have her cake and eat it too.”
We explained that if properly done, she could borrow the money for the property and construction costs and write off the interest expense on her tax return – effectively reducing her interest payments by half.
The Solution
We advised Miranda on the following process:
- Sell out her investment portfolio and use the proceeds to buy the new property
- Go to the bank and borrow an equivalent amount of money back
- Invest the borrowed money back into a non-registered investment portfolio
- Write-off the interest cost on her tax return
- Annual tax savings of $35,000/year in this case
- Leveraged Investment:
This is an example of a leveraged investment and does come with risks. However, depending on your financial situation, this can be a great way to create an interest-free loan and keep your investments intact while pursuing real estate opportunities. A leveraged investment is an investment that involves borrowing money to buy an asset with the expectation that the asset will increase in value, thereby generating a profit for the investor. The borrowed money is used to enhance the potential return on the investment.
One of the benefits of a leveraged investment is that it allows investors to use other people’s money to invest. This means that investors can potentially earn a higher return on their investment than if they had used only their own money. It also allows investors to diversify their portfolio by investing in a variety of assets.
Another benefit of a leveraged investment is that it can provide tax benefits. The interest paid on the borrowed money can be deducted from the investor’s taxable income, reducing the amount of tax that they have to pay.
However, there are also risks associated with a leveraged investment. The most significant risk is that the asset may not increase in value as expected. If the value of the asset declines, the investor may not be able to sell the asset for enough money to repay the loan. This could result in a loss of the investor’s own money, as well as the borrowed money.
Conclusion
A leveraged investment can be a great way to create an interest-free loan and keep your investments intact while pursuing real estate opportunities. However, it is important to consider the risks associated with a leveraged investment and to seek advice from a financial advisor before making any investment decisions, an advisor can answer questions like “is acorn finance legit“. With proper planning and execution, a leveraged investment can be a powerful tool for investors looking to grow their wealth.
We can help
We are here to help you meet your investment goals and we welcome your questions. We work with business professionals, executives, and families to grow and protect their wealth using our Wealth Plan formula. To discuss our approach and if it is the right fit for you, we invite you to schedule a no-obligation discovery consultation.
Disclaimers
Using borrowed money to finance the purchase of securities involves greater risk than a purchase using cash resources only. If you borrow money to purchase securities, your responsibility to repay the loan and pay interest as required by the loan’s terms remains the same even if the value of the securities purchased declines