Playing the game of Credit

Rich and poor both use credit. Poor need credit while the rich have mastered the game of credit. For them, credit means leverage, tax benefits, and liability insurance.

A few days back, I had posted ‘Why did I refinance my car loans today‘, I had someone ask me “Oh, so you went into debt with 2 cars” -> That is what prompted me to write this post.

What is Credit?

Let us first define what do we mean by Credit -> Credit is any form of borrowing. The most common forms of Credit include credit cards, student loans, auto loans, and mortgage.

Why rich use credit

Everyone uses Credit – rich as well as poor

Everyone uses Credit, the poor as well as the rich. At first it sounds ironical – why would someone rich borrow money (use credit/ go under debt). Well, read on, and by the end of this post you will know why?

The image conceptually represents what I am trying to say – poor use a large proportion of credit lines available to them. The middle class tries to minimize the use of their credit lines, and then the rich again try to use as much credit as possible.

This chart is more conceptual, we will make a couple of minor tweaks to it as we develop this post today.

Why do Poor use Credit

Poor live on credit because they are not able to make the ends meet. They have credit card debt that either accumulated over time or was a result of some unforeseen circumstances (medical expenses for example).

The middle class, in my opinion, uses the least credit. And that is the right thing to do for them. Using credit even when you do not need it is a game best suited for the rich or the middle class who understands the game that the rich play.

Credit card debt is bad, very bad for your financial health. The middle class should spend only as much on the credit card as they can pay off in full every month. This keeps developing credit history in addition to earning reward points.

Do not underestimate the amount of rewards points you can earn. Many credit cards out there offer 1.5% in cash back. For someone who spends $1,000 every month, that is $15 per month, $180 a year, and $900 a year. And all this for just paying by your credit card in stead of debit card.

Rich play the game of credit

Rich have all the money in the world. They could afford to buy cars and houses by paying cash but they do not. They try to live on credit as much as possible, for 3 reasons – leverage, tax benefits, and liability insurance.

Credit provides Leverage

Leverage enhances returns. Let us take an example:

Let us assume a hypothetical scenario – a house costs $50,000 and pays a rent of $1,000 per month. A rich person who has $500,000 to invest in real estate can buy 10 houses and earn an income of $10,000 per month, or $120,000 per year.

Now if the rich borrows money to buy houses – he puts down $500,000 and borrows an additional $2,000,000 from the bank. Now the rich has a total of $2,500,000 and he can buy 2,500,000/ $50,000 = 25 properties.

These 25 properties will pay him $25,000 per month in rent, equaling $300,000 per year. The rich person has to be interest rate to the bank, say 5%. 5% on  $2,000,000 is $100,000. After paying interest the rich has $300,000 – $100,000 = $200,000 remaining as compared to the $120,000 he had without the loan (leverage).

“Give me a place to stand and with a lever I will move the whole world.” – Archimedes

You can read here why I think leverage is a more powerful tool in real estate as it is in the stock market.

Credit provides Tax Benefits

With the help of CPAs and tax attorneys, the rich have devised sophisticated strategies. Sometimes they are very simple and sometimes they can be quite complex. Many a times, they include writing off the interest payment as an expense. Let us take a couple of examples from real life:

Tax shield for the self employed

Someone who is self employed: He or she can deduct the car interest expense to the extent the car was used for business purposes.

Mortgage interest on primary residence is tax deductible. So a mortgage interest rate of 4% for someone in the 25% tax bracket effectively is costing them only 4% (1-0.25) = 3%.

(Note: The mortgage interest deduction gets phased out at high income levels – at incomes higher than $254,200 for singles. Still this example is good for illustrative purposes, the rich use tax shield through their corporations too). 

For poor – 100% of their AGI (Adjusted Gross Income) comes from salaries and wages.

For the rich – For a typical rich taxpayer who makes less than $500,000, salary accounts for 75% of the AGI. The corresponding number for $500,000 – $1,000,000 is just over 50%. This number drops to 15% for those making $10 million or more a year (85% of the AGI comes from capital gains, dividends, and business income).

Borrowing on margin

I have heard people saving for the down payment for their primary residence. If you are a little more astute (and have a long time horizon), you would rather invest in the stock market and sell the stock when you need money for the down payment. Isn’t that what the rich do?

NO – the rich will not sell stock, they will borrow on margin against the stocks, make a down payment, and write off the margin interest as investment expense!

Liability insurance

When do people get sued? Not when they are wrong but when they have something to offer as a result of a lawsuit. Even IRS pursues only those cases where it finds a reasonable possibility to collect taxes. For the rest, it will stamp your file as CNC (Currently Not Collectible) and suspend all collection activity and release any levy.

Similarly, the rich get sued because they have the assets. But when all the assets are bought on credit, the rich own nothing, it is the creditor (bank) who owns everything.

The rich use a host of other and probably more effective asset protection or wealth shielding strategies. The discussion about those strategies and the corporate veil (including piercing the corporate veil) is for some other time.

The new diagram

While the image in the first section of this post was accurate conceptually, the number of Rich people who play the game of Credit is far less than the number of Poor people who spend their lives paying interest on their Debt, hence below is a more accurate picture of the distribution.

Why rich use credit

Everyone uses Credit – rich as well as poor

Conclusion

Credit is a two way sword. It can either kill you or help you. Poor, middle class, as well as the rich – use credit, albeit for different reasons.

Poor use credit because they just do not have the money to pay off their credit card debt.

Middle class uses debt because they cannot otherwise afford to make big purchases like a house or a car. (Upper middle class also uses their credit card regularly to build credit history and get reward points but they pay off their credit card in full every month, and not carry a balance – interest is charged on the carried balance).

The rich use credit because they know how to play the game. For them credit means enhanced returns due to leverage, significant tax benefits, and a means of liability insurance.

Hopefully I have lived up to the promise I made earlier today – by the end of this post, you will now what I mean by “Rich play the game of credit”.

23 thoughts on “Playing the game of Credit

  1. Can you explain how exactly paying downpayment using margin account money works? Margin account debt charges 8% APR and in addition from what I understand IRS only allows to deduct the margin interest if the money was used to purchase investment, not house or house item. How this could be beneficial?

    • Great questions, Michal. Let me explain.

      In the past, I also paid close to 8% on margin interest. BUT one of the biggest discoveries I made last year is a brokerage firm (IB) that charges less than 2% interest on margin loans. See here – https://www.interactivebrokers.com/en/index.php?f=interest&p=schedule2

      So IB charges 1.65% interest for margin balance up to 100,000 and 1.15% for 100,000 to 1 Million. So, for a $200,000 margin balance, you will pay 1.65% *100,000 + 1.15% *100,000 (total of 1.4%).

      Isn’t that great? Moreover IB charges only $1 commission per trade.

      Compare that to TD Ameritrade – they charge $9.99 per trade. I have a high respect for TD Ameritrade, do not get me wrong, I have been an adviser to TD Ameritrade myself in the past for their investments business. As an ’employee’ (they classified external advisers also as employees for trading account purposes), I did not pay commissions till the time I was advising them.

      Now, like everything else, IB has it’s own disadvantages too – main ones being:
      1. The user interface is rudimentary and difficult to understand
      2. They charge for streaming data – I have never paid since I always have other windows open with market data
      3. IB has the quickest ACATS transfer (transfer of your stock from another brokerage firm to IB) – I was shocked to see that the transfer completed in 3 days… while many others in the market take 3 weeks. But the good part ends there, funding IB afterwards is the toughest – if you send them a check, you can use the funds only after 7 business days. If you want to use ACH, then you have to use extra security measures (An iphone app that generates a password real time). Once you install the app, you have to get the security code from the app every time you would like to log into your account.

      Now addressing the second part of your question – IRS/ deduction/ investment expense:

      You are right that IRS allows to deduct margin interest if the money was used to purchase investment. Even though you will withdraw the money using margin to make a down payment on your house, technically the money is being used to finance the stock holding. Let us see if I can explain better:

      You have $100 stock holding all paid in cash. Let us say you borrow $25 using margin. For IRS / accounting purposes, the equation becomes, you are holding a $100 stock, out of which you paid $75 and you borrowed $25 from your broker.

      It is the easiest to understand this when you are buying new stock. You have $100 cash in your checking account…. you transfer $75 to your brokerage account, borrow $25 from the broker, and buy stock for $100. You have $100 stock and still $25 remaining in your checking account.

      Buying on margin and withdrawing cash using margin have the same effect as far as IRS accounting goes. What you borrow on margin is an investment expense. I have deducted this in the past myself (line 14, Schedule A of Form 1040).

      Lastly – Remember ‘Margin is Risky’ – you are borrowing money to buy stock. If stock prices fall, you might get a margin call. It will be a nightmare if you are forced to liquidate your positions because then it will be ‘Buy high and sell low’. So please use margin carefully.

      Good luck, keep me posted of your progress 🙂

  2. This is a very fascinating article, thanks, Bobby.

    Just this last year, after my financial situation started to “pick up”, I made what I thought was the very prudent, responsible, and smart financial choice by refinancing my home loan with a $215k principle from the remaining ~24 years @ 5.125% fixed to 15 years @ 3.000% fixed.

    My thinking was obvious for a “middle class” person: for a marginal increase in my monthly mortgage (something like $200/month), this will save me well over $100k in interest alone. Huge, right? I’m the smartest guy in the room, right? Well, maybe…but maybe not, I think, after reading this post. 😉

    Maybe a better approach would have been to re-up my re-fi back to 30-years fixed at ~3.250% (or whatever it was at the time), dropping my monthly payment by $300. That would have left me $500 extra per month to invest at a low-3s interest rate – without even cashing in the ~40% equity I have built in the house (i.e. leaving me with a stable real-estate investment in addition).

    I doubt I’ll go through another re-fi just to grab that $500/month out of the air…but, after reading most your blog this evening, I do believe that a “rich person” would do just that, because without even opening Excel I can imagine the long-term return on that $500/month will beat the pants off the ~$100k in interest that I saved.

    I suppose the thing that is starting to shift in my mind is that, while the re-fi for me was a long-term and safe play, “long-term” is precisely the situation in which stocks/investing are the most “safe” – and return the greatest reward.

    • UPDATE: I suppose the TRUE “rich person” runs some math and make an educated decision. 😉

      I did some quick math on the difference scenarios I posed above, and, over 30 years, assuming a 6% return, the difference is dramatic – but not insanely so. The key in my case is that after the home is paid off in 15 years, I can take my entire principle after the home is paid off and instead invest it directly in to the market for the remaining 15 years of the former 30-year term.

      Here are the basic figures I came up with, starting first with my current baseline (I actually used “today’s” interest rates vs. what I had when I re-financed):

      – 15 years @ 3.125% fixed (my credit union’s current fixed rate) = $269,588 total cost of the loan, including $54,588 in interest. The monthly payment is $1,498 for 15 years. If we use this as a baseline to compare vs. a 30-year loan, that give me 15 years straight of investing $0, and then 15 years straight of investing $1,498 per month. This will return $443,513.35 after the latter 15 years of investing if the online calculator I used is accurate.

      For all models, including above, I am assuming I am spending $1,498 every month for 30 years one way or another. In the example above, it is simply 15 years paying off the mortgage, and the following 15 years investing. Next let’s look at a 30-year loan today:

      – 30 years @ 4.125% fixed (my credit union’s current fixed rate) = $375,119 total cost of the loan, including $160,119 in interest. The monthly payment is $1,042 for 30 years. This means that every month for the entire 30-year duration, if I spen the same $1,498 as above, that gives me $456 to invest per month (after my mortgage payment is paid). This will return $458,562.77 after 30 years if the online calculator I used is accurate.

      So, on its surface, the 30-year loan is just BARELY worse at 6% returns – but the total coast of the loan itself is $105,531 cheaper on the 15-year loan, which actually puts the 15-year loan significant ahead of the 30-year.

      HOWEVER: I did not calculate (and am not sure how to easily calculate) the tax benefits of all that interest. I don’t imagine it can make up for the difference in savings/return for the 15-year loan option, however.

      ALSO: Using a more aggressive return, e.g. 8% returns, flips the results. In that case, the 15-year option comes out around ~$635k ($530k investments + 105k loan savings) vs. the 30-year loan @ ~$700k after 30 years of investing the monthly mortgage savings.

      CONCLUSION: Assuming the interest-tax benefits don’t shift these numbers dramatically, I actually feel OK with my decision, even if it was made in ignorance. I would consider myself a conservative saver (i.e. prepare for all of my business ventures to crumble to pieces at a moment’s notice), so I do appreciate the reduced exposure of owning the home outright ~15 years earlier while potentially giving up ~$100k of earning potential if the market is particularly strong. And the weaker the market, the better my ignorant 15-year play will turn out. 😉

      I’d welcome any thoughts / suggestions of things I missed! I’d sleep better at night the more battle-tested this back-of-the-envelope math becomes. 🙂

      Investment Calculator: https://www.daveramsey.com/blog/investing-calculator#/entry_form

      • Sean – I am very happy to see that my article provoked the exact thought process that I intended to, your assessment of 15-year v/s 30-year is right on target, including the 6% v/s 8% scenario.

        About the tax benefit on the interest paid – I see many people struggling with that and I have a beautiful solution: ‘effective interest rate’ is ‘actual interest rate’ multiplied by what is called ‘tax shield’. Tax shield is (1 – tax rate).

        Example – Someone who is in the 25% tax bracket, pays an interest rate of 4%, gets a tax deduction of 1% (4% interest multiplied by 25% tax bracket). So the effective interest rate paid is only 3% {which is the same as 4% * (1 – .25)}

        The only caveat there is – mortgage interest deduction phases out at high income levels (single filers starting at $254,200 and married filing jointly starting at $305,050).

        Run your numbers again with the mortgage interest tax deduction.

        One additional advise for you – use Excel (in stead of calculators) as much as possible. The benefits will be enormous.

  3. Hi! I just discovered your blog through Quora and I spent the whole evening reading it. It is great!

    My name is Matteo, I am 31 and I live in Switzerland. I really think your approach to investing is sound and well-thought. I already apply many of the principles and tricks that you describe. I invest all my money in well-diversified worldwide equity ETFs and I avoid bonds, real estate and commodities.

    I would be really interested in understanding a little bit better how would you practically use leverage in the stock market. I am not used to it, but I clearly see the long-term advantage of buying on margin, although I ask myself whether costs do offset gains or not. What is your view on that?

    Thank you very much and congrats again for your great blog!

    Matt

    • Hi Matt,

      Thank you for the kind words of appreciation. I love Switzerland, specially the Alps and the chocolates. I also hold the ETF called EWL here in the US. It tracks the top 40 companies of Switzerland – I keep going back on forth on whether I should continue to hold EWL or not. Expense ratio of 0.48% worries me but each of the 5-year/ 10-year/ 15-year returns are in excess of 5%.

      Coming to your specific questions about leverage: Buying on leverage is really easy. Here in the US, you just need an account with ‘margin trading privileges’. If your account is approved for margin trading privileges, you can just buy more stock in your account even if there is no available cash. The broker is lending you money to buy stock and will charge you interest on this sum of money.

      My guess is – Switzerland also works on similar lines.

      Now coming to the next part of the question – whether costs do offset gains or not? That primarily depends on the margin interest rate and the returns from the stock market. Margin interest rate is what you pay the broker to borrow money. Returns from the market are what you receive because of your investments.

      Clearly, if you are paying 5% to the broker and making 4% in the market, then you are losing money.

      The first time I borrowed money on margin (not too long ago), I paid an interest rate close to 7-8%. Now a days, I am paying less than 2%. I just found a broker that provides really money at really low rates.

      (For today, I am ignoring the tax breaks one can potentially receive by paying margin interest).

      Lastly – margin is risky, specially if you get a margin call and have to sell stock in order to meet the margin requirements. So I never advise to use as much margin as the broker allows, just a little bit.

      Oh one more point – options trading also provides leverage but like the name suggests it’s trading and we are talking about long term investing.

  4. Hi Bobby,

    Thanks for coming by AssetRover and recommending this article. I was curious about the two different graphs you had for credit utilization. The first one is a conceptual one with the poor using debt 100%, the middle class down to 0%, and the rich back up to 100%. The second one shows a different, and probably more realistic curve. Are you showing real data on that second one versus the conceptual one? I like the graphic and it makes you think.

    Great post and I love reading the good dialogue between you and the readers as well. For those who want a real estate focus on leverage, swing by and check out http://assetrover.com/blog/leverage-5-ideal-reasons-investing-real-estate-part-5/

    Thanks!
    Bill

    • Hi Bill,

      I am glad you made the time to go through my post and the interesting followup discussions initiated by readers.

      You are right on target about both the graphs – the first one is conceptual. I started to write this post without having actual data but somewhere mid-way I realized that the graph isn’t as symmetrical as I am showing it to be.

      So I collected a lot of data (about credit cards debt, auto loans, and mortgages) to arrive at the second graph. Although the second graph data might not be 100% accurate (It is impossible to find credit utilization ratio for all Americans when you are talking about all forms of credit), it is still close to reality like you pointed out.

      I let the first graph be there because it’s a good foundation to start the discussion.

      I am glad you like the graphics, I hope you continue to visit my blog regularly so that my readers can benefit from our collective wisdom. I intend to do the same with your blog.

      Best,
      Bobby

  5. I used the margin money to buy a stock. After 3 days, i transferred money from my checkings a/c to brokerage account. Am i still using margin? Money I transferred is more than margin i used

    • Short answer: No

      Long answer: If you buy stock today (Monday), the seller gets the money on Thursday, you start to pay margin interest on Thursday.

      If your money arrives on/ before Thursday, then no interest. If your money arrives on Friday, then one day interest.

      And you do not have any margin balance (loan) remaining once the money comes in since it is more than the amount borrowed.

      As always – margin business is risky business. In this scenario though I think you have the money in your checking account and you would like to buy today and simultaneously transfer money from your checking account to your brokerage account – I do not see any flaw in that rationale.

  6. Hey Bobby –

    Love your website and contributions on Quora! Your writing is super readable, and thus far, it has inspired me to open up an account with Personal Capital, switch out of a few mutual funds with expense ratios that were too high, and (soon) open up a backdoor Roth IRA.

    One thing I’ve been wondering about is asset allocation amongst taxable and non-taxable investments. I’m curious what you think is optimal for a voracious risk appetite with some sort of an efficient frontier in mind.

    I like some of the ideology behind Wealthfront.com as a starting point, but I don’t have the accounting background to fully appreciate the tax efficiencies. For 10/10 maximum risk on a taxable investment mix, it recommends 35% VTI US Stocks, 22% VEA Foreign Stocks, 28% VWO Emerging Market Stocks, 5% VIG Dividend Stocks, 5% XLE Natural Resources, and 5% MUB Municipal Bonds. For a 10/10 maximum risk on a retirement investment mix, it recommends 20% VTI US Stocks, 18% VEA Foreign Stocks, 31% VWO Emerging Markets stocks, 5% VIG Dividend Stocks 16% VNQ Real Estate, 5% LQD Corporate Bonds, and 5% EMB Emerging Markets Bonds.

    From reading your site, I know you go back-and-forth around with the idea of international diversification; I’m curious about your thoughts on EM in the long-term. I imagine you would think the commodities “hedge” for lower variance is not worthwhile as there’s no positive expected value historically; also, I feel like you might be more bulled up on stocks than the bond exposure suggests (these convenient, 5% levels also feel like risk reduction). I’m curious about your thoughts on where to put some of the alternative investments you’re involved in – LendingClub, RealtyMogul, Fundrise, and how they fit into the big picture.

    At the risk of asking too many blurred questions at once, I also have been thinking about how to best optimally implement leverage. I saw one post where you stated that you owe InteractiveBrokers money, and was just curious what strategy was implemented there.

    Thanks for your help!
    BK

    • Hi Brian,

      It makes me proud to read that I am making a difference to your finances. You should be proud too – I have only been writing for a few months and you seem to have grasped almost everything that I have been saying. Some of your comments (specially the one about emerging markets) are music to ears – only someone who follows my posts regularly can make that kind of a comment.

      To answer your question about “Taxable and non-taxable investments” – Firstly let us be clear that we are talking about taxable and non-taxable accounts (and not investments).

      There are some investments that are tax-free (for example municipal bonds) but here you are talking about taxable accounts v/s non-taxable accounts/ tax-deferred accounts.

      For example – see the spreadsheet I use to keep track of my tax lots – it has a column called ‘Taxable’ – that refers to the account.

      The question about Taxable vs Non-taxable accounts is a great question – I have done a lot of research in the area and have finally concluded that just by holding bonds in non-taxable accounts you can boost your annual returns by around 0.2% – 0.25% (for an average upper middle class investor).

      About alternate investments – I would think go the Fundrise/ Realtyshares route if you otherwise do not have too much exposure to real estate. If you look at a diversification visual I created yesterday – I give three examples of Alternates – Real Estate, Commodities, and Private Equity.

      The easiest way to get into alternates is commodities ETF and REITs. Though you yourself described precisely why I do not like commodities. REITs are nice (and relatively low risk) but they do not return as much as Fundrise/ others. The other alternate is to own real estate physically (be a landlord).

      Interestingly enough – 2 people approached me this week asking if I will ‘partner’ with them to invest in real estate – one is a personal friend and the other is a reader from this blog. I am still thinking whether it will be a good idea – to pool money and invest.

      About leverage – my strategy was simple. I compare ‘cost of funds’ to ‘return on investments’. As long as I can make more on my investments, I do not mind funding my investments through leverage. Though leverage is risky – people have gone bankrupt in order to maximize their gains. I am currently at about 15% leverage – so I have $115 invested for every $100 that I actually have. Even I do not intend to ever go beyond 30%.

      Leverage enhances returns – both positive and negative!

  7. Thanks for the response and kind words.

    Regarding real estate – should you pursue a pooled real estate opportunity, I could potentially have interest. We’re both in NY, would be happy to meet / have that conversation.

    I appreciate your take on leverage – I respect the risk appetite! Will look to modestly add the double-edged sword on dips moving forward. This is namely referencing one’s brokerage account? Just wondering if there’s any way to get any more juice out of the Roth IRA or 401(k).

    Thanks again
    BK

    • Hey BK, Good to see you again.

      Pooled real estate opportunity – I have seen it done successfully as well as unsuccessfully.

      Successful execution happens when things are done professionally. Decisions are documented from the very beginning – specially about who is responsible for doing what? Is there one person with superior investment knowledge and others are only contributing money? How will the returns be split? Who will decide where to invest/ how much to re-invest? Can partners ask for their money back – how much advance notice do they need to give? Who will have signing authority on bank accounts? Who will have view only rights? Who will do the accounting? Who will do the taxes? Who will select property management company (will conflict of interest need to be disclosed?)? Who will select any vendor (plumber, electrician etc.). How often will investor reporting be done? In what media/ format? Etc Etc.

      I have to respectfully decline the opportunity to meet – I would have loved to meet but my full time career on Wall Street (and blogging, girlfriend, dogs, family, managing my own investments, doing my own taxes, learning new things about money, and continuous failure at losing weight) does not leave me much time.

      401k and IRAs do not allow margin trading and I would advise against it even if they did.

      (Technically – some brokerage firms allow ‘partial margin trading in IRA accounts’ – this is a very specific and a very small situation but I will mention it for the sake of completeness: Some brokerage firms will allow you to use ‘unsettled cash’ – that is use the cash to buy stock even when you have not received the cash – during the settlement period. You get the cash 3 days after you sell the security).

  8. Sure – meeting was within the context of a potential investment. I have no particular expertise / background in the area outside broad financial strokes, but do have intellectual curiosity in the idea.

    Thanks again for the color.

    • Is there a way you can anonymity the investment and we can discuss here? This way others can also learn from our discussions – fundamentals never change in any investment ever. It’s all about time and money, in fact it is all about time value of money!

      Intellectual curiosity is all it takes to master anything over a period of time, you started your journey – hopefully we will take this journey together 🙂

  9. Hey Bobby, I just stumbled upon this article whilst researching ways to play the money game. Love the reads & I’ll definitely be sharing this blog! (Have you ever thought about writing a book to educate the new millenials/ others in general?

    As a new millennial entrepreneur I recently have gotten the opportunity to have stake within a growing property management company. My partner runs her own commercial cleaning company so I saw the synergy that this could bring for the property management opportunity.

    So the situation is there are a total of 200 shares within the property management company, the developer has bought some, the construction company have bought some (leaving 50% left)

    I’m looking to buy some as well as the oportunity oresented itself. but I know to never use your own money when investing in business opportunities unless you absolutely have to. So my question is as a young entrepreneur with no credit debt & having good credit as well as never taking a loan of any sort (except for education) what is the best way to go about this? What type of loan should I take & should I consider taking one?

    • Hi Kevin, appreciate your find words.

      I do not know how accurate is “never use your own money when investing in business opportunities unless you absolutely have to”. Whether you invest your own money or you borrow and invest, it is more or less the same. (The only difference is – you will be able to deduct the interest you pay on borrowed money).

      Let me explain – when you borrow money and invest, you owe the money to someone irrespective of the business (unless the business is able to borrow money which is unlikely in this case). You have to pay back the borrowed money irrespective of how the business does.

      Now coming to the second part of your question – how should you go about it? Well firstly be very careful. Others who know the intricate details of this specific business are not taking the ‘50% left’ stake for a reason. May be it is just too risky.

      Secondly it all depends on the valuation, how much is the 50% costing you today and what is the cash flow it will generate in the future.

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