Wealth Secret – Borrowed at the Best Interest Rates to Leverage High Yield Investments
By Lee Coates
Sometimes it even makes sense to borrow at a high interest rate, if the loan is for a short term; you may still end up dollars ahead. It may be worthwhile to borrow money at the best interest rates for the purpose of investing in high yield investments. This allows you to use the leverage of borrowed money which you pay back with the money earned from the higher yield investment. If the investment is pledged for security, you may be able to reduce the rate of interest calculation, since the loan is fully secured. Also this is a method of forced savings, because you will be committed to repaying the loan. And remember, the interest cost on loans for investment purposes is deductible for income tax purposes in most jurisdictions.
Let’s look at a couple of examples. You want to buy a $200,000 house as a rental property. You have the 25% down payment of $50,000 and you want to borrow $150,000 and the lowest mortgage rate right now is say 5%, so the mortgage costs you $875 per month. Now with a rental property you also have other expenses – property taxes $100 per month, Vacancy allowance of $75 per month, maintenance allowance of $75 per month, management fee of $50 per month and property insurance of $50 per month. This would total $ 1200 per month in expenses. So the question is can you get $1200 or more per month in rent? If the answer is yes, it would make sense to buy it, if you plan to hold it for the long term. You would now own an appreciating property, where you have leveraged your down payment four to one. Your biggest asset of course is your tenant who pays the rent every month and keeps an eye on the place for you. And over the years the rents should go up giving you a positive cash flow. Read more