Investing LOC

[Douglas31 24]

I am in my final year of law school and thus have only used around $20,000 of my $100,000 line of credit. I received it at 3.2%. Now, it is starting to hit me that I only have access to this line of credit at this ridiculously low rate for another year. I feel like all law students have been given a gift in terms of access to capital (with no track record, other assets). 

I am thinking that the smartest play now would be to take out as much money as possible on the LOC and invest it elsewhere. Whatever returns I receive would likely cover the interest on the loan. Note that I have spoken to Bank reps about this (Specifically buying a house), and they said while they cannot directly encourage such behaviour, they note that a lot of students max out their lines of credit before they finish school for investment opportunities. 

Has anyone had experience with this or want to comment on this? I see a few options.

1. Buy a house... Most solid investment and safest I would say (long term). However if I was to do this I would be buying an investment property (to rent out) because I am articling in a different city that I would intend to buy in (familiarity). 

2. Stock Market - Obviously risky. I do have experience with this however and would stick to safe investments.

3. Mutual Funds... Max out RRSPs??? Not much experience here... Anyone want to comment? Is it a good idea to invest in mutual funds on your own without going to an advisor?

 

Thanks

[maximumbob 8671]

8 hours ago, Douglas31 said:

I am in my final year of law school and thus have only used around $20,000 of my $100,000 line of credit. I received it at 3.2%. Now, it is starting to hit me that I only have access to this line of credit at this ridiculously low rate for another year. I feel like all law students have been given a gift in terms of access to capital (with no track record, other assets). 

I am thinking that the smartest play now would be to take out as much money as possible on the LOC and invest it elsewhere. Whatever returns I receive would likely cover the interest on the loan. Note that I have spoken to Bank reps about this (Specifically buying a house), and they said while they cannot directly encourage such behaviour, they note that a lot of students max out their lines of credit before they finish school for investment opportunities. 

Has anyone had experience with this or want to comment on this? I see a few options.

1. Buy a house... Most solid investment and safest I would say (long term). However if I was to do this I would be buying an investment property (to rent out) because I am articling in a different city that I would intend to buy in (familiarity). 

2. Stock Market - Obviously risky. I do have experience with this however and would stick to safe investments.

3. Mutual Funds... Max out RRSPs??? Not much experience here... Anyone want to comment? Is it a good idea to invest in mutual funds on your own without going to an advisor?

 

Thanks

Unless you've had a prior career, I doubt you have any material RRSP room (and, as a student, probably don;t have enough income to make the most of the deduction, though you can carry that forward until you do).  You should have significant TFSA room, though.  

Nothing wrong with borrowing money to invest, and, yes, the student/professional line of credit is a ridiculous deal.  I would note that if you do it in a taxable account, it's important to segregate your borrowing for investing from your borrowing to pay for school (since interest on the former may be tax deductible, interest on the latter is not).  Also, if you max it out, once repayment starts you have to make the ~$1000 a month payments regardless of how your investment performs.  Will you be in a position to do that?  

On buying a house, people think it's a solid and safe investment.  It really isn't.  If you look at long term returns on housing, it performs worse as an asset class then, say, a stock index.  We've had a 30 year run up in the GTA and GVA so there's a generation of people who think real estate is a no lose investment.  But those of us with a slightly longer memory (specifically the late 80's/early 90's) can remember a time when people lost big. And when you're at a point where there's been a 30 year run up in prices and interest rates are just coming off of record lows with, almost literally, nowhere to go but up ...    And renting your property isn't riskless. You may have trouble finding tenants, you may have bad tenants and have trouble evicting them. 

[wakawaka 397]

Being a landlord while articling in a different city sounds like a recipe for disaster. How is your firm going to like it when you rush out of the office in the middle of the day to fix a leaking pipe?

[BlockedQuebecois 4877]

3 hours ago, wakawaka said:

Being a landlord while articling in a different city sounds like a recipe for disaster. How is your firm going to like it when you rush out of the office in the middle of the day to fix a leaking pipe?

https://www.mrrooter.ca/toronto/

I agree with the sentiment. The example is bad  

[harveyspecter993 839]

On 11/17/2017 at 6:39 AM, wakawaka said:

Being a landlord while articling in a different city sounds like a recipe for disaster. How is your firm going to like it when you rush out of the office in the middle of the day to fix a leaking pipe?

Well, I suppose OP could hire a property management company. 

[Luckycharm 1870]

Can you afford to lose $80,000?

[leafs_law 994]

Where are you buying a house that $20,000 will cover down payment and closing costs? And is it a hut in northern Russia? Not to mention that there's no way you'd ever qualify for financing when your down payment is the last bit of room on your student line of credit. 

However, aside from that, I think investing your LoC is a great idea. Yes, there are risks, but becoming wealthy requires one to take risks. 

[Abii 92]

I like this thread. My $0.02:

So right now I have a condo in Van. The rent I'm getting from it is covering 90% of the monthly cash outflow and the capital gain has been significant in the past two years. But if I get into law school (fingers crossed) I will cash out. My plan is to invest 100% of the money I walk with by maxing my TFSA and whatever RRSP room I have. I'll be buying ETF's as per the Canadian Couch Potato recommendations. Mutual funds have lower returns than ETF's (for the most part) and they also have higher management fees. The only mutual funds I would touch would be Mawer funds (particularly Mawer 150 and Mawer 104). 

With the money that's left I will try my absolute best to get a small mortgage in Edmonton or Calgary (provided I get into UofA or UofC). My monthly mortgage payment and condo fee would be around 1000 dollars. I will also apply for a student line of credit and use that to pay for the monthly condo fee and mortgage (again, around 1000 dollars). Upon graduation I will sell the condo and wipe the line of credit debt clean. I've done some preliminary math and I think this is a good plan. 

 

For you, I don't think buying real estate is prudent. Here's what I would do if I was in your situation:

I would borrow the 80k (does the bank allow you to borrow that much in one go?) and max out my TFSA. If you've never thrown anything in your TFSA, you have 57000 in contribution room (57k as of Jan. 1st 2018). But don't go near ETF's. Here's why: your interest rate will not stay at prime + zero or Prime + 0.5 for perpetuity (I've been told that 5 years after graduation your interest is automatically jacked up significantly. Please check the fine print of your agreement and see if this is true. I'm interested to know as well.). I would instead purchase a Mawer 104 or Mawer 150 fund, or both. Expect around 6-7%. Mutual funds are actively managed and they usually charge the investor a chunky amount, which could cost hundreds of thousands of dollars over a 30 year period. And for this money they rarely beat the index. But if another 2008 happens, some of these mutual funds can be more sheltered than a portfolio that is full of stock ETF's. You can shelter your own ETF portfolio by dedicating a quarter or a fifth of your portfolio to bond ETF's, but in your case it's probably easier to just buy a Mawer fund and call it a day. 

I don't think you should use the money as down payment because of the potential rate increase 5 years after graduation (again, I'm not sure about this so please check the fine print). But even without it, I don't think any of the major banks would be willing to give you a mortgage without income. Even if you show up with 80k. They will check to see where that money came from. When I got my mortgage, my bank (Van City Credit Union actually) checked to see where my down payment came from by asking me to provide my bank account statements going all the way back to X number of months/years. They also asked for 2 years of income (minimum). This was before the stress test as well. I honestly don't think you'd be approved. 

As another poster mentioned, you haven't built up enough of an RRSP contribution room either. Basically they calculate your RRSP room by looking at your previous year's income. Your RRSP room for this year is 18% of your previous year's income, for example. That leaves your unused TFSA room, which I'm assuming is all of it (57k as of Jan. 1st). The investment I would go with inside the TFSA is a Mawer 104 balanced fund, if I were in your situation. 

http://www.mawer.com/assets/Fund-PDFs/Fund-Profile-BAL.pdf

 

Sorry about the long ramble. 

Edited November 19, 2017 by Abii

[Douglas31 24]

16 hours ago, leafs_law said:

Where are you buying a house that $20,000 will cover down payment and closing costs? And is it a hut in northern Russia? Not to mention that there's no way you'd ever qualify for financing when your down payment is the last bit of room on your student line of credit. 

However, aside from that, I think investing your LoC is a great idea. Yes, there are risks, but becoming wealthy requires one to take risks. 

I should have mentioned that if I do the mortgage.investment property option, I would probably go half in with my parents. If not that, then they would likely cosign for me. Also, I will be articling at a large Toronto firm in August so I will have income coming in at that point. Perhaps I would wait until I had income coming in. (I also would not be buying a house in toronto, would be buying in a smaller market out West, likely a newer multilevel where I can rent out the top and bottom floors separately. I have done the math on some of these and rental income can be close to 2700 - 3000 a month and monthly payments from 1500 - 1800 if renting out both floors

 

Abii: Thanks for the insight that was really helpful. I definitely should contact Scotia and find out about the increasing interest rate. And to be clear, you are recommending putting mutual funds into my TFSA? I kind of forgot about TFSA, but I see this could have great tax advantages. 

So I think it comes down to maxing out my TFSA (with likely mutual funds, stocks are too risky especially since market is at all time high). Or Invest in a investment property with backing from my parents (Assuming interest rate does not go up after 5 years. 

 

Thanks

Edited November 19, 2017 by Douglas31

[Abii 92]

7 hours ago, Douglas31 said:

I should have mentioned that if I do the mortgage.investment property option, I would probably go half in with my parents. If not that, then they would likely cosign for me. Also, I will be articling at a large Toronto firm in August so I will have income coming in at that point. Perhaps I would wait until I had income coming in. (I also would not be buying a house in toronto, would be buying in a smaller market out West, likely a newer multilevel where I can rent out the top and bottom floors separately. I have done the math on some of these and rental income can be close to 2700 - 3000 a month and monthly payments from 1500 - 1800 if renting out both floors

 

Abii: Thanks for the insight that was really helpful. I definitely should contact Scotia and find out about the increasing interest rate. And to be clear, you are recommending putting mutual funds into my TFSA? I kind of forgot about TFSA, but I see this could have great tax advantages. 

So I think it comes down to maxing out my TFSA (with likely mutual funds, stocks are too risky especially since market is at all time high). Or Invest in a investment property with backing from my parents (Assuming interest rate does not go up after 5 years. 

 

Thanks

Yeah, exactly. Whatever you do, don't let the banks talk you into buying one of their mutual funds. Their own funds are garbage and on top of that they charge you 2-3% for the privilege of owning their garbage funds. You can also dip into your TFSA if you need the money. In an RRSP account it's much more complicated. You'll have to pay taxes at your highest marginal rate if you do. Unless you take some money out for a down payment. But even then you'd have to replace the money within 15 years if you want to avoid getting taxed on the gain. So first max out that TFSA.

Some interesting reading material:

http://forums.redflagdeals.com/couch-potato-investing-last-12-years-tracking-my-progress-1489988/

One of Warren Buffet's all time favorite books (I've just started reading it myself): https://www.amazon.ca/Intelligent-Investor-Definitive-Value-Investing/dp/0060555661/ref=sr_1_1?ie=UTF8&qid=1511148680&sr=8-1&keywords=the+intelligent+investor+graham

Also, what cities in the "West" are you looking at? 

Edited November 20, 2017 by Abii

[Douglas31 24]

3 hours ago, Abii said:

Yeah, exactly. Whatever you do, don't let the banks talk you into buying one of their mutual funds. Their own funds are garbage and on top of that they charge you 2-3% for the privilege of owning their garbage funds. You can also dip into your TFSA if you need the money. In an RRSP account it's much more complicated. You'll have to pay taxes at your highest marginal rate if you do. Unless you take some money out for a down payment. But even then you'd have to replace the money within 15 years if you want to avoid getting taxed on the gain. So first max out that TFSA.

Some interesting reading material:

http://forums.redflagdeals.com/couch-potato-investing-last-12-years-tracking-my-progress-1489988/

One of Warren Buffet's all time favorite books (I've just started reading it myself): https://www.amazon.ca/Intelligent-Investor-Definitive-Value-Investing/dp/0060555661/ref=sr_1_1?ie=UTF8&qid=1511148680&sr=8-1&keywords=the+intelligent+investor+graham

Also, what cities in the "West" are you looking at? 

So would Scotia have a problem with me coming in and saying I want to invest the loan they gave me for school and invest it in a outside fund in a TFSA with them?

I did have a meeting with them once about using my loan to buy a house. They said they can't actively encourage it but if they don't know where the moneys going then its fine (something to that effect)

Also, I would be looking at a house in the Alberta market. Most likely Edmonton.

[Douglas31 24]

Also, why not get an ETF instead of a mutual fund. As I understand it the expenses are much cheaper. Are these more risky? Additionally, I am aware that the markets are at all time highs and have been steadily increasing for years. Any concern over a 2008 repeat? 

 

 

[Abii 92]

2 hours ago, Douglas31 said:

So would Scotia have a problem with me coming in and saying I want to invest the loan they gave me for school and invest it in a outside fund in a TFSA with them?

I did have a meeting with them once about using my loan to buy a house. They said they can't actively encourage it but if they don't know where the moneys going then its fine (something to that effect)

Also, I would be looking at a house in the Alberta market. Most likely Edmonton.

Not too sure how they would take it. Depends on the agent I guess. No reason to tell them though. You can take the money out and then set up the TFSA. 

1 hour ago, Douglas31 said:

Also, why not get an ETF instead of a mutual fund. As I understand it the expenses are much cheaper. Are these more risky? Additionally, I am aware that the markets are at all time highs and have been steadily increasing for years. Any concern over a 2008 repeat? 

 

 

I prefer ETFs myself. The reason I said you should buy a Mawer fund is that this particular fund is quite balanced. For example their 104 fund doesn't have any investments in oil/gas (I think) and 30% of the fund is allocated to bonds (in a 2008 type crash, your portfolio would drop by only a fifth instead of 50%). Of course you can do the exact same thing yourself. For example you can buy a bond ETF and allocate 30% of your funds to it. With an active MF though, the fund manager usually keeps a little bit of cash on hand to re-balance the fund in shitty situations. That, too, is something you can do. The biggest enemy of gains in the market is you yourself. Think about it this way: say you had 100% of your funds allocated to stock ETF's back in 08 and once the market tanked, you took all your money out. You would have lost 50% of your cash. In another timeline you could have recognized the fact that markets always recover and, hopefully, you would have kept some cash on hand for that eventuality (in order to buy when they market tanked). Before I continue this story, let's look at the math:

You have 100 dollars and you lose 50%. You're going to need to achieve a 100% growth in order to get back to where you were when you first got into the market. In 2008, that happened by 2013 if I'm not wrong. Alternatively you could have invested more money when the market tanked (dollar cost averaging) and by 2009-10 you would have been where you started. From then on you would have made money. 

What I was trying to explain with that story earlier was that even if you do everything right, you don't know how you're going to act until you're in that situation. You're in a much stronger position to do the right thing if your time horizon is 30 years, as opposed to 5. You're also more likely to do the right thing if your loss is only 20%, as opposed to 50% (due to panic). Can you achieve the same thing as a Mawer fund (in terms of limiting losses), yes. But you're gonna be in charge of the ship a lot more. So it's up to you. 

I have some experience with stocks, but I've personally never purchased ETF's and mutual funds (although my pension funds from my old job are all invested in mutual funds). I'm reading as much as I can right now because in roughly 6 months I'm going to have to invest a lot of money following the sale of my condo  

My only concern is that the market has been rallying for a long time and markets ALWAYS crash. If your time horizon is long-term, you don't need to worry. You just have to make sure not to go all in. Buy every quarter instead. This way you'll have money to take advantage of dollar cost averaging etc... Still, how will we react when we see 30% of our  portfolio erased in a matter of months? Right now I believe I can stay the course. But nobody can say for certain until they've walked the walk. I haven't. 

I forgot to put up a link for this earlier. This is actually a short read and it's super inspirational. She's divided the blog in 5 pages, so make sure you keep going once you read Part 1 (again, it's short and doable). 

https://www.millennial-revolution.com/invest/the-breakdown-part-1-god-we-were-spendy-back-then/

 

[Luckycharm 1870]

I think the title of this thread should be

"Gambling LOC"

LOC is NOT your money. 

A lower interest rate doesn't mean it is "free money". You have to pay them back and the interest meter will start running the minute you draw on the LOC. 

"Gamble" with money that you can afford to lose. 

 

[conge 1216]

5 hours ago, Douglas31 said:

So would Scotia have a problem with me coming in and saying I want to invest the loan they gave me for school and invest it in a outside fund in a TFSA with them?

I did have a meeting with them once about using my loan to buy a house. They said they can't actively encourage it but if they don't know where the moneys going then its fine (something to that effect)

Also, I would be looking at a house in the Alberta market. Most likely Edmonton.

The emphasized text seems really important to me. I'd think carefully about what they are trying to convey here...

Edited November 20, 2017 by conge

[maximumbob 8671]

6 hours ago, Douglas31 said:

Also, why not get an ETF instead of a mutual fund. As I understand it the expenses are much cheaper. Are these more risky? Additionally, I am aware that the markets are at all time highs and have been steadily increasing for years. Any concern over a 2008 repeat? 

 

 

ETFs are mutual funds, they're just mutual funds that are traded on the stock exchange (well, strictly speaking, they're open ended mutual funds that are traded on the stock exchange, as opposed to exchange traded closed-ended mutual funds - stay away from those, they're invariably too expensive).

In practice, ETFs tend towards passive investment strategies (e.g., index funds, or formula-based investment strategies) as opposed to actively managed funds.  But that's not uniformly true, and there are actively managed ETFs.  Because of the different investment strategies, ETFs do tend to be cheaper (some of the index funds have, essentially, nominal management fees, but then they should since they just track the index), but again you need to check the specific fund to confirm that.  And there are relatively inexpensive conventional mutual funds (TD's e-series funds, for example, are dirt cheap, though they're a pain in the ass to buy, I think RBC has some as well).  As always, the risk doesn't depend on the type of fund, but on the underlying investment strategy - read the prospectuses/offering documents.  

IF you want to invest in ETFs, the secret is a low-cost brokerage account (I used to have one with Questrade, but there are a host of others out there), to keep your transaction costs down.  You can set up TFSA, RRSP and taxable accounts with them.

Only caveat with a TFSA (and an RRSP, but in practice it's a bigger deal with TFSAs) if you trade actively in your account (e.g., you're a day trader), you risk having the CRA come after you on the basis that you're carrying on a business, such that any income/gain gets taxed).  Likely not an issue if you're buying and holding ETFs, but if you're buying and selling regularly it can become an issue - I've had a number of clients make a lot of money in their TFSAs only to have the government try to tax it.   

[Douglas31 24]

Is there somewhere to go to do more research on different mutual funds? I have looked into Mawer a bit and have a good idea about it. I am assuming you (Abii) have done lots of research on different funds? And Mawer were the ones that looked best to you?

[Abii 92]

3 hours ago, Douglas31 said:

Is there somewhere to go to do more research on different mutual funds? I have looked into Mawer a bit and have a good idea about it. I am assuming you (Abii) have done lots of research on different funds? And Mawer were the ones that looked best to you?

When I first started looking around I opened an account on Canadian money forum.com 

Tons of people recommend Mawer funds there. The industry seems to use Morningstar ratings quite a bit to evaluate funds and Mawer funds have some of the best Morningstar ratings and recommendations I could find. But there are definitely others out there. Spoke to my uncle and he swears by a fidelity tech fund he's holding (I think it's called the Fidelity Technology Innovators Fund) and it's had ridiculous growth over the past few years. But it's 100 percent stocks and there's inherent risk in a fund like that if you're throwing everything in. 

I still haven't found a tool to analyze all funds properly. Even subscribed to Morningstar to see if they have a tool on their site, which they supposedly do, but I couldn't make heads or tails out of it. Gave up and unsubbed. 

[StudentLife 108]

Maybe use 20k to buy some Bitcoin BTC and cash out in 1-2 years time frame at 5-10x returns. 3x is probably a conservative return in 1 year's time from current valuations.

The other cash, down-payment for a house makes sense paying off as much of the mortgage as possible.

Please don't do anything involving stocks though, stock markets are in a bubble right now and will correct or crash sooner or later.

 

[StudentLife 108]

Sorry, I should have clarified a few things. Personally, I put about $10 k in BTC in late 2017 (from government student loans not LOC), which is already worth substantially more than the initially invested cash amount. My time frame is 1 year for 3-5x gains, and 2-3 years for 5x-50x gains. There is no way to predict what will happen but I think BTC in 2018 will be in the price discovery phase with a fixed supply response and exponentially increasing demand from both institutions and retail investors. Think of it as both the new digital gold and global currency that everyone will soon want a piece of. It will be much higher from 2017 pricing levels in 2018/2019, but hard to say exactly by how much. Some analysts say it could be 500k to 1 million by 2021; however, 100k in 2 years’ time seems like a likely number based on various analytical projections. If the forum likes, I could post back in 1 year’s time and 2 years’ time and let you all know how it turned out! 

Disclaimer: Everything I have said, including the above, should not be taken as, and is not intended to provide, investment advice.