How to use other people’s money to invest in stocks and real estate

I have used other people’s money in real estate and in the stock market.

Other people’s money has catapulted me out of economic stagnation.

Real Estate

Five years ago I heard about a website called Airbnb where people can rent their property to tourists and earn more than if they rented their properties to regular tenants.

After many sleepless nights, because I was constantly thinking about offering a property through Airbnb, I decided to give it a try.

I borrowed $50,000 from friends and family at a 10% interest rate.

Then I went to the bank and used the $50 as a 20% down payment for a $250,000 property and I started Airbnbing. It worked like a charm. Usually, the rent for an apartment of that value in my neighborhood is about $1,200. But I was bringing home over $3,000 every month. Eventually, I was able to pay back my debt of $50,000. My friends were sad to see those 10% interest checks stop coming.

The stock market

For many years, I have been fascinated with the stock market. I drank the kool-aid. The rhetoric is that in the long run, global markets give a return of about 8%. The only trick is to withstand the short-term ups and downs. I have read in a few places (but never done the research myself) that on any 20 year period, the stock market in the US has never lost money. So that’s my business plan. I borrow money for 4% then I invest it in the stock market with the hope of getting 8%. If everything works out, my profit would be 4% (8% – 4% = 4%).

Last year my global portfolio went up about 14%. After paying 4% for the use of other people’s money, I made 10% without a single dollar out of my pocket. I don’t know how to calculate a return when I didn’t put any money out of my pocket. I guess that having credibility and being trusted is as important in business as having capital.

By the end of this year, I want to reduce my leverage to 10 to 1. This means that for every $1,000 of mine, I will borrow $10,000 from other sources. I will continue this process until I reach $1,000,000 at which point I will start paying down all my debts.

What I am doing, borrowing money and investing it, is extremely risky. It’s a combination of madness and naivete. I have endured many nights of poor sleep. I would not recommend what I am doing to anyone.

If you are interested in using other people’s money, here are some ideas.

How to use other people’s money

Before you start. Be aware that markets don’t go straight up. Know that they can go down by a lot. During the year 2008, the US market went down as much as 50%.

Be ready to think long term. It would take years to build a significant portfolio and build a track record that will give you credibility. Increase your savings over the long term by making smart domestic investments like free nights and weekends.

Most likely you will have to have skin in the game, which means that you will have to put your own money at risk.

Here it is:

1. Margin account. When you have a broker’s account, the broker might lend you up to 50% of the value of a security to make your purchase. Imagine that you want to buy $10,000 of Royal Bank stock. You could put $5,000 and the broker will lend you the other $5,000. The broker will keep the stock as collateral until the debt is paid. If the value of the stock goes down, you could get a “Margin Call” informing you that you have to sell the stocks or put in more cash. On the other hand, the broker will be willing to lend you more money if the value of the stock goes up. Beware, this is not a free loan, the broker will charge interest, usually Prime rate plus 1% or  2%.
2. A line of credit. If you have good credit and a stable relationship you’re the bank, the bank will be happy to lend you money through a line of credit. The interest rate for that loan in generally Prime Rate plus 1% or 2%. If you have a house or any other property as a guarantee, the bank could lend you money at a lower rate.
3. Friends and family. This the most common yet most dangerous source of funds. Your family and friend know your character. They know whether you are the kind of person who will pay the money back no matter what or if you are irresponsible and always getting into financial difficulties. There is a lot more at stake than money. If you ever default on your margin account or your line of credit, the banks will write that off as the cost of doing business, but if you don’t pay your family and friend, the stigma will never go away. You will be always, a non-trusted person. The conversations at Christmas time and Thanksgiving can be awkward, and who knows, maybe there will not be a place for you at the table.

1. My ideal portfolio: 1/3 Canada, 1/3 US, 1/3 International. No bonds
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3. When to buy individual stocks

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