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Keep in mind another benefit - if you invest directly from your line of credit, you may also be able to deduct the interest in computing your (property) investment income in your income taxes.

 

In contrast, if you spent your line of credit on... Living expenses for example, you wouldn't be able to make that interest deduction.

 

That being said, reducing your income tax really only benefits if your total income for the year exceeds your basic tax credits. For most students, income is next to nothing so it wouldn't make a difference.

 

You do run the risk of a market downturn though...

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Investments, including the safest ones, all have something in common - risk. Some more than others, but all carry risk, including money under the mattress (due to fire or theft). As there is no risk free investment, why risk borrowed money which is meant for another purpose entirely. And to risk your entire LOC is insanity! In the 1929 crash, when previously wealthy people were jumping out of buildings and committing suicide, they had borrowed every dollar they could on margin to buy more stock and when the market crashed and they were sold out and their loans called, they could not pay, so they paid with their lives. The only sure thing in life is death and taxes, not returns on investments. Ask Bernie Madoff who supposedly gave very high and safe returns to financially sophisticated people who lost their shirts on "safe" investments providing "excellent" returns. What do medical students really know about finance and investments? Doctors are renown for their lack of investment knowledge. 

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So let's say, (hypothetically perfect scenario), you found a 7%, very stable/safe, investment. Would it make sense to invest as much of your LOC into it as possible?

 

Roughly speaking LOC is 2.5%, so net would be 4.5%, on 200,000, or 9,000/year.

 

 

a perfectly safe 7% return is actually a very hard thing to find :) If there were easy the bank would never loan you the money in the first place - they would simply buy the 7% investment directly.

 

ok, so there are a few things with this to keep in mind - first we are at the top of an investment cycle right now (it seems - I mean no one knows for sure). The stock market has ramped up almost 3 fold from where it was in 2009. For the past year the stock market has drifted around almost in an unfocused state, and the earnings to price ratio for many companies is falling - people are having a hard time seeing how it could move farther forward - and we may be overdue for an adjustment. In real estate the interest rates are at an all time low, many markets are likely over heated and in many areas in particular the price jumps are kind of scary almost. Bond prices are of course in the toilet.

 

If you believe in buying low and selling high this may not be exactly at great time to jump in etc ha

 

as for the income tax benefit - depending on how this structured you would still have to pay the income tax each year. Your 7% investment - is that after tax, broker frees etc, etc?

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Investments, including the safest ones, all have something in common - risk. Some more than others, but all carry risk, including money under the mattress (due to fire or theft). As there is no risk free investment, why risk borrowed money which is meant for another purpose entirely. And to risk your entire LOC is insanity! In the 1929 crash, when previously wealthy people were jumping out of buildings and committing suicide, they had borrowed every dollar they could on margin to buy more stock and when the market crashed and they were sold out and their loans called, they could not pay, so they paid with their lives. The only sure thing in life is death and taxes, not returns on investments. Ask Bernie Madoff who supposedly gave very high and safe returns to financially sophisticated people who lost their shirts on "safe" investments providing "excellent" returns. What do medical students really know about finance and investments? Doctors are renown for their lack of investment knowledge. 

 

yeah we have to do something about that :) This isn't really all that hard actually but you are right. The things I see already as a resident terrify me, ha.

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So let's say, (hypothetically perfect scenario), you found a 7%, very stable/safe, investment. Would it make sense to invest as much of your LOC into it as possible?

 

Roughly speaking LOC is 2.5%, so net would be 4.5%, on 200,000, or 9,000/year.

 

Now we aren't really answering your question - because you are excluding all possible risk (which of course isn't possible blah, blah - it makes people nervous even thinking that way as thinking there is no risk is exactly how people get burned in investing. Every single time. As soon as people stop thinking of risk it is likely a good time to consider if we are in a bubble). Lastly the investment would have to be liquid enough to actually withdraw money for school etc if needed.

 

But if it was true, and also could somehow ensure that the 2.7 prime rate also does change in the next 4 years (unlikely), and you are paying no tax on that investment etc, etc (possible as a student - although using up tax credits is still using an asset in a sense so that doesn't count.) Finally there somehow are no fees involved (which is odd). 

 

You would make as you point out around 8.5K a year with a lot of assumptions (prime is 2.7 rather than 2.5) - and if you never need the LOC for school or to pay the interest (5K a year for the 200K you took out) then you could do this, and make in theory about 27-34K over the course of the training.

 

however in doing so you would have 200K in assets kicking around - the investment. That means that you will get no OSAP under the asset rules, and no bursaries from the school either - people with 200K in investments don't need assistance is the logic. The values of the grants and bursaries for me were MORE than 34K. Much more actually. And that "income" was tax free and risk free. Of course not everyone qualifies for OSAP although most med students will.

 

this all being said - the LOCs are tempting aren't they - this big pool of money just sitting out there at a low, low rate. There must be some way to make that money work for me in an logical way, and with leverage I will make more money (you just invested someone else's money but you are taking the profit - that is leverage. That concept comes up a lot in real estate investing). Has to be ways to use it for something ha.

 

It isn't as easy though - and there are a lot of reasons why it often doesn't make sense. There are risks - quite big ones actually - and the rewards are relatively small in most cases compared to those risks. There are ways to make it work - real estate is probably the most common one actually - but the most important thing I think you are investing in medical school is yourself - you are turning yourself into a money making machine in a sense for the rest of your life. That has to the primary focus :)

 

I would recommend learning about investing in medical school though - important time I think. People keep asking me for books to read on that and I really should create a list or start a website or something ha.

Edited by rmorelan
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ok, so there are a few things with this to keep in mind - first we are at the top of an investment cycle right now (it seems - I mean no one knows for sure). The stock market has ramped up almost 3 fold from where it was in 2009. For the past year the stock market has drifted around almost in an unfocused state, and the earnings to price ratio for many companies is falling - people are having a hard time seeing how it could move farther forward - and we may be overdue for an adjustment. In real estate the interest rates are at an all time low, many markets are likely over heated and in many areas in particular the price jumps are kind of scary almost. Bond prices are of course in the toilet.

 

If you believe in buying low and selling high this may not be exactly at great time to jump in etc ha

 

There are a lot of arguments against timing the market though, because most people (including hedge fund managers) cannot reliably do it. The idea of simply holding onto broad-market ETF's seems to be popular right now (e.g. canadiancouchpotato.com), and if you follow that strategy the earlier you invest the better (assuming the market cannot be timed).

 

Personally, I think it's not an unreasonable way to invest if done properly

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however in doing so you would have 200K in assets kicking around - the investment. That means that you will get no OSAP under the asset rules, and no bursaries from the school either - people with 200K in investments don't need assistance is the logic. The values of the grants and bursaries for me were MORE than 34K. Much more actually. And that "income" was tax free and risk free. Of course not everyone qualifies for OSAP although most med students will.

 

If you're in Ontario, this advice is super important. OSAP includes guaranteed grants (7.5-10k/year) that no investment can match. Your first priority should be to preserve OSAP by not creating assets from thin air through borrowing

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There are a lot of arguments against timing the market though, because most people (including hedge fund managers) cannot reliably do it. The idea of simply holding onto broad-market ETF's seems to be popular right now (e.g. canadiancouchpotato.com), and if you follow that strategy the earlier you invest the better (assuming the market cannot be timed).

 

Personally, I think it's not an unreasonable way to invest if done properly

 

oh absolutely - in fact there is only one time I think you need to worry about what the market is doing, and that is when you are going to invest "all your marbles" all at once - like investing the entire LOC in one go. Then you kind of have to pay attention to the market a bit at least as you cannot take advantage of dollar cost averaging. Even then you cannot "time" things really all that well.  Timing is very hard and in theory impossible according to much of modern economic theory.

 

I would fully, 100%, support for almost all investors a low cost (I mean LOW here, as in a management fee of less than 0.2%) broad index fund purchased regularly. Simple, boring, and gets great results.  If it helps anyone Warren Buffett thinks that approach is the best - ha, and even bet 1 million against one of the top fund managers that the index approach was better. I am sure you are all surprised that he basically won that beat (although there is still 2 years on the clock - he is currently up 40 points on the other guy (that is a huge amount)). 

 

That is actually what most of the modern financial planners will tell you - well the ones not on commission anyway from your purchases. Canadiancouchpotato is one of the sites that goes over that in detail - efficient market hypothesis and the impact of management fees all going over. Ha, I have read every post on that site I think.

 

Just gave a presentation to the ottawa med students one how MD financial vs index funds has the no brainer index option beat MD in every category, every time. Not to single them out really (although they are suppose to serve us in particular so I am annoyed they are ripping us off) - I mean 96% of all mutual fund/hedge managers cannot beat the market when their fees are included - and these are people that are supposed to know what they are doing. Not that they would again tell you any of this - banks/brokers don't make any money when you go index fund, and you really have to understand that there is a huge conflict of interest there - you want to be successful you cannot optimally as a banker etc serve your clients and your bosses in any forum of commission structure (which almost all of them are in).

 

This is exactly why YOU need to educate yourself. We talk about knowledge being power - well this is one area where that really, really holds. Knowledge to give you the power to do what you want in life/retire a decade earlier than the other guys with the same investment amounts, etc, etc.

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This is exactly why YOU need to educate yourself. We talk about knowledge being power - well this is one area where that really, really holds. Knowledge to give you the power to do what you want in life/retire a decade earlier than the other guys with the same investment amounts, etc, etc.

 

So true!

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I am investing some of it, but not all of it. Seems safer that way. Also risk is definitely always there, but if you invest in bricks and mortar type stocks the risk is more in the sense that there could be an economic down turn and you couldn't take it out for a while. Less that the company could literally go under. With that said it helps that I know a financial advisor ... 

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So let's say, (hypothetically perfect scenario), you found a 7%, very stable/safe, investment. Would it make sense to invest as much of your LOC into it as possible?

 

Roughly speaking LOC is 2.5%, so net would be 4.5%, on 200,000, or 9,000/year.

Can you tell us, what kind investment is 7% very stable/safe ? I really like to know.

I think investing on Canadian Big-5 banks is stable and safe with "some RISK", but only have around 3.5% divined return. 

 

I think you are talking about REIT, especially D.UN ? I'm very tempting to use my LoC for some D.UN for a few months, but still a no at this moment.

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Can you tell us, what kind investment is 7% very stable/safe ? I really like to know.

I think investing on Canadian Big-5 banks is stable and safe with "some RISK", but only have around 3.5% divined return. 

 

I think you are talking about REIT, especially D.UN ? I'm very tempting to use my LoC for some D.UN for a few months, but still a no at this moment.

 

so would every pension manager in the entire country :)

 

and the banks are only relatively safe - I mean they have had events in the past 10 years where they have lost about 50% of their value, and took a few years to recover. (and I mean canadian banks here - the US of course had much more serious problems ).

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What do you guys think about using the LOC to purchase a condo instead of paying rent for the 4 years? I mean paying $1400/month rent is an insane amount of money being wasted

Depends on where you are purchasing, the associated condo fees and if you will solely be using the LOC or have other income for down payment etc. And what your mortgage payment would be etc.

 

I know a few who did this, but they did it during more favourable times and with parental support for down payment etc.

 

At the moment, I wouldn't personally reccomend it..but at the same time there aren't very many condos under 400k in my region.

 

Generally buying a condo would be a great idea...but given only 4 years and no guarantee of residency, it gets a bit trickier over the short term.

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Depends on where you are purchasing, the associated condo fees and if you will solely be using the LOC or have other income for down payment etc. And what your mortgage payment would be etc.

 

I know a few who did this, but they did it during more favourable times and with parental support for down payment etc.

 

At the moment, I wouldn't personally reccomend it..but at the same time there aren't very many condos under 400k in my region.

 

Generally buying a condo would be a great idea...but given only 4 years and no guarantee of residency, it gets a bit trickier over the short term.

 

 

I woudn't recommend it until residency for many reasons. And then, the mortage rate is actually less than the interest rate for the LOC, and depending upon the down payment, you won't need funds from the LOC. And then there is the point of Commons, the cost of a condo will exceed the LOC.

 

For instance, to rent a good condo (1 bedroom) at mississauga is $1400/month. It seems like to purchase them it's around 250-350k. Wouldn't it be a good idea to purchase it rather than pay rent for 4 years? For residency, you can either sell the condo or rent it (and the rent will pay off the monthly mortgage?)

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Under your scenario, the LOC would evaporate for an unintended purpose. Not a good thing in my view. You don't have a clue where you will end up. You will ultimately be going into another business - the rental business. Not a good thing, nor is it easy. I have seen landlords bitten by their tenants. Why take this risk? For the potential gain perhaps? And if there is a glut in the market and you do not choose good tenants?

 

There is an expression that expensive can be cheap and cheap can be expensive. To perhaps save a little, you are exposing yourself and going into the property business when your focus should be medicine. You are in no position at this stage to speculate, so don't. Wait. When you are wealthy and have your own money to risk (not borrowed money), that is another story. For now K.I.S.S. - Keep It Simple Stupid.. 

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And how do you pay the monthly mortgage payments? Whenever there is a bubble, people lose their minds and want to speculate, not taking into account any potential downside. Medical students are not speculators, that is not where their focus ought to be. The dream is not the reality.

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And how do you pay the monthly mortgage payments? Whenever there is a bubble, people lose their minds and want to speculate, not taking into account any potential downside. Medical students are not speculators, that is not where their focus ought to be. The dream is not the reality.

 

I agree with most of the points you are making but at the same time, I feel like paying (wasting) 80k in rent over the next 4 years is not a financially wise decision. Investing into buying a condo may not be a stupid idea after all !

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So, I assume you will buy without a mortgage b/c the mortgage company requires disclosure of what you owe (i.e., LOC) and you will not get a mortgage if you use your full LOC or anything close, i.e., using half your LOC will be difficult if not impossible to get a mortgage. And assuming you were able to buy for cash using your LOC, you would have nothing left with which to pay for your ongoing cash flow needs.  

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For instance, to rent a good condo (1 bedroom) at mississauga is $1400/month. It seems like to purchase them it's around 250-350k. Wouldn't it be a good idea to purchase it rather than pay rent for 4 years? For residency, you can either sell the condo or rent it (and the rent will pay off the monthly mortgage?)

Depends on your down payment, and what your mortgage ends up being and strata fees and market when you want to sell(dont forget all the real estate fees too for purchase and sale). Its honestly not worth it for short term. Unless you have family who's willing to put the down payment or something.

 

I imagine your mortgage payment will definitely be higher, and unexpected costs repairs. And dont forget the interest accumulating too (though this would occur with rent also, but this will now occur on your down payment and increased monthlies).

 

Its make more sense once you start residency in my opinion.

 

 

Also, you're a student, you have no need for a "good condo". Rent a slightly cheaper one without the fancy countertops and apllicences. I dont know.much about GTA real estate butfriends of mine are paying about 1400-1600 for really nice brand new condos(as a couple) downtown Toronto, so I imagine there must be some older buildings but with the same amount of space for 1000? Or is that off base for your area?

 

In YVR, for a 2 bedroom you can pay 2000-2600+ for a really nice new 2 bedroom condo, Or you can pay 1500-1800 for a older 2 bedroom but still nice apartment in a heritage like building. Or around 1500 for a nice 2 bedroom basement sweet(but its a basement).

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