Tuesday, November 13, 2012

How to Get Rich - Use Other Peoples' Money - Part Two

Do you know how to use other peoples' money to grow your wealth ?

Do you think all types of loans are created equal ?

This post is a continuation of my first post on this topic ( "How To Get Rich - Use Other Peoples Money" ) review first post before proceeding (check the side bar for link under most viewed posts)

All loans are not created equal.  Read on to find out what investment loan, if any,  may best be suited for you in your current position.

Line of Credit 

A Line of Credit is an open ended load that can be paid off at any time and quite often you can make interest only payments which keeps your investment working longer for you. This type of loan is recommended for most liquid investments such as stocks and bonds, REITs, Royalty Trusts, etc. Basically for anything that can be cashed in quickly if necessary.

If you have equity built up in your home, you should also be able to secure your line of credit with this equity in order to ensure a much lower interest rate. Secured lines of credit generally receive a much lower interest rate as there is less risk for the lenders.

Mortgage

A Mortgage is a loan on Real Estate that is secured by the actual real estate. If you own your home, you will likely already be very familiar with this form of loan. I generally only recommend this form of investment loan if you are planning to purchase revenue producing real estate as your investments. These are not well suited for liquid investments as there are too many restrictions and penalties built in should you decide to cash in your investment and pay off your loan. Good for long term revenue producing real estate only.

Margin Accounts

Margin Accounts are loans that are offered by your stock broker and are secured by the asset you are purchasing. I'm not personally comfortable with this form of loan as your broker can require partial or full repayment at any time your investment is below water (in a loosing position) You have absolutely no control over when to make repayment and you may have to sell your investment at a loss in order to repay your loan. Losing money on your investments is never a good way to get rich.

What To Choose

The line of credit, the mortgage and the margin account are basically the most widely used forms of "using other peoples' money" that investors use today. Which form you use will be determined by your type of investment, the length of time you wish to hold your investment, and last but not least, the form of loan that you will be able to qualify for.

I personally use lines of credit and mortgages for my investments and have never used a margin account. I believe in having total control over when I repay my loan amounts.

Using other peoples' money can be very rewarding, however, there is also a great deal of additional risk involved and should only be utilized by experienced investors. This is not the place for the average investor to be starting as it could lead to a total loss of the invested amount should things go wrong.

As always, I welcome your comments and suggestions for future topics.


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