Power investment equity by combining Equity+Margin Loan

[extremeinvestor]

I have an ideas to increase equity for investment.

Refinance an home load to get equity loan of $100,000 at interst rate of 8%pa.

Use $100,000 to buy shares with a margin loan of $200,000 at interst rate of 9.5%pa.

So, the total equity on the shares is $300,000. Return of share portfolio is 25%pa.

Total return: 25% x $300,000 = $75,000
Total interest expenses: 8% x $100,000+9%x200,000= $26,000
Tax deduction on interest (30%): 30% x 26,000 = 7,800

NET RETURN ON THE STRATEGY: 75K - 26K + 7,8K = $59,800
RETURN RATE: 59K/100K = 59%

Can you give any comments and point out if there is any wrong with these strategy?

 

[kris]

What if things don't go as planned?

You'd have to be pretty optimistic to gear that heavily on something that returns 25% pa.

 

[extremeinvestor]

Thanks Kris for your points.

If the market falls down, the portfolio drops -5%.

Captial lost: $300,000 x 5% = $15,000
Interest = 26,0000
Total LOSS = $41,000

So, I have to plan reserving $26,000 from work salary to pay for interest and suffer lost $15.000

Any other comments and points for this strategy.

 

[WallyB]

ei,

Without doing any sums initial thoughts are:

- 25% is very optimistic. Try googling market returns over the long term and see if you get anything >10%/ annum average
- you're gearing your margin loan very high so likely you may have margin call which forces u to sell at a correction point ie sell when shares are low
- listed property may give you marginally better returns with less volatilty?? than shares (especially now...)
- what type of shares/ managed funds will you buy- high yield or high growth. High yield may give solid dividends (not 25%) and high growth may give you 25% over short term (given u can pick the market) but cgt needs to be factored

good luck

 

[The Y-man]

I have an ideas to increase equity for investment.

Refinance an home load to get equity loan of $100,000 at interst rate of 8%pa.

Use $100,000 to buy shares with a margin loan of $200,000 at interst rate of 9.5%pa.

So, the total equity on the shares is $300,000. Return of share portfolio is 25%pa.

Total return: 25% x $300,000 = $75,000
Total interest expenses: 8% x $100,000+9%x200,000= $26,000
Tax deduction on interest (30%): 30% x 26,000 = 7,800

NET RETURN ON THE STRATEGY: 75K - 26K + 7,8K = $59,800
RETURN RATE: 59K/100K = 59%

Can you give any comments and point out if there is any wrong with these strategy?

There is an error I think in your return calculation with regards to the tax return. There will in fact be tax payable as the strategy is CF+.

It is more likely to be 30% tax PAYABLE (in the case of company return):

So tax payable on (75k - 26k) x 30% = $14.7k

Actual cashflow: $34.3k

Technically, your return rate can not be calculated, as there was no capital injected (it was 100% borrowed).


In reality, you will find brokerage will also add to your costs.

The strategy itself is fine AS LONG AS YOU CAN OUTPERFORM the prevailing interest rates.

Cheers,

The Y-man