In terms of investment, it is different from the
certainty of loans. An example of the private debt field we use is the Trez
Capital Yield Trust, which invests in US mortgages (because they are less relevant
to Canadian real estate). In the past five years, the Canadian dollar’s hedge
version has grown at an average annual rate of 9.9%, although we do not expect
a high return over the next five years. In addition to private debt, the
Toronto Stock Exchange’s utility index has a five-year deadline of 7.79%, as of
June 30, 2019. The Toronto Stock Exchange listed real estate investment trust
index was 7.80%. The Toronto Stock Exchange’s monthly financial income in
Canada is 5.64%. From 2009 to 2014, all three countries have had higher returns
over the past five years. Although there is no guarantee, we can say that the
return on these investments is 7.5%.
Let us assume that this person has $100,000 in
income and lives in Ontario. In one version, they pay the investment adviser a
1.5% investment fee, while in the other version they pay to themselves.
On the surface, some people earn 7.5%, the interest
paid is 2.75%, and the annual spread within five years is 4.75%. Of course,
things are not that simple.
We need to consider taxes and fees. I will keep it
simple, but emphasize some points.
First, interest on a mortgage can be completely
tax-free because you are borrowing funds to invest in a taxable account.
Second, if the investment is made in a taxable
account, the investment advisory fee can be completely tax-free.
Given their personal income, their marginal tax rate
According to my calculations, if the return on
investment is all regarded as income (which is the worst case), they will
receive 7.5%, then be able to deduct 2.75% of the mortgage interest, and then
deduct 1.5 investment consulting fees.
If they levy a 43.41% tax on the remaining 3.25%,
they will maintain 1.84% after the tax. If they do this themselves and don’t
pay any investment management fees, they will reach 2.69%. This is based on a 7.5% return minus 2.75%
interest, leaving 4.75%. After levying a 43.41% tax, this will leave 2.69%.
These numbers may not look huge, but they can add up
For more than five years, at $108,400 for $100,000,
after-tax will be $9,200, no compound.
Before tax, you need to earn $16,257 to get $9,200 after taxes. Remember,
this is the wealth created by someone else’s money.
If the same scenario uses $250,000, the after-tax
funds are $23,000 or the pre-tax income is $40,643.
If the same scenario uses $500,000, then the
after-tax income is $46,000 or the pre-tax income is $81,286.
Managing your own investments, including partial
capital gains or Canadian dividends rather than income returns, and reducing
borrowing costs below 2.75%, all can increase the return you get from this
It is important to remember that all the returns
described here cannot be guaranteed.
There are some risks, but if they stay low, this
strategy may be a powerful way to use other people’s money to increase wealth.