Lux Investing

I have a business idea that I want to get some feedback on.?

I am thinking of borrowing money from either a financial institution or private lenders; and taking that money and investing it in some sort of fixed-income investment such as a bond or C.D. I would make money by profiting from the spread. An example, I borrow money at 6.5% and invest it in a bond at 8.75%. The difference of 2.25% between the loan and the bond, would provide me with a nice cash flow. The advantages of this business model is that I assume no risk, since all money used is borrowed. Unless the bond issuer defaults, the math works out to a "T." What potential pitfalls do you see? Do you have any modifications? What are some areas that I am overlooking? Do you know of any articles that I can read that would enhance my understanding of borrowing or lending money? All constructive criticism is welcome.

Public Comments

1. First of all, a private lender or institution will want to know what it is you are investing in. If there is any risk in your investment they will either decline the loan or charge a higher interest rate. These types of lenders are pretty smart and if they aren't going to lend you money to make money when they would be better off buying these instruments (bonds, in this case) on their own. Try again... By the way, it would be pretty hard (impossible?) to find a CD or bond at 8.5%... http://money.cnn.com/markets/bondcenter/ www.bankrate.com
2. You forgot to subtract the capital gains tax from your equation. Also, remember that you only receive the gain when you sell the bonds. You have to pay the interest on loans each month. Also, you need to qualify for those loans and therefore are risking your real property. Bonds are usually not that high interest. Anything as high as 8.75 is also very high risk. You net gain is more like 1.5%, which may not may not be worth gambling you assets on.
3. Be very careful before you invest any hard earned or loaned money. My advice is to fully research before you begin. The best strategy by far - and i have seen a lot is this one http://www.planet-wealth.com/ref=3623 Pay a few dollars and get this beek - it is invaluable - a small investment in your future
4. First of all, it sounds like a great plan...if it were possible. Right now, with interest rates at the level they are, you will be hard pressed to find a bank that will give you an unsecured loan at 6.5% interest. Banks will charge a prime plus X interest rate and when prime is almost as high as the level you want, they won't make money on the deal. The second problem is finding a safe bond at over 8%. Bond yields are around 5% so if you borrow, then invest, you will lose money. To earn 8% or more, you will need to invest in stock and the bank will not lend you money to do that. Ron, ChFC
5. this is a nice example in theory, but as other posts have pointed out it is unrealistic due to risks and the fact most bonds are nearer 5% and most personal loans are nearer 7%. More realistic options are to start a business that has a product or to invest in someone elses business (stocks), both of which have significant risk especially for those without much experience, so if you go that route start out slowly. If something sounds simple and looks like it will make you rich without much work: doubt it.
6. Why would institutions or private lenders want to lend you @ 6.5% when THEY can buy the same bond @8.75% or better due to a volume doscount?