Grow and stay rich with “Smart debt”

Significance of high initial investments

Let’s pretend that you’ve invested $75,000 cash in a real estate investment that yields an annual 15% cash
return. Let us assume you hold the investment for about 10 years and the equity value of the property grows by
20% by the end of this period. On an absolute basis, your $75,000 investment would have received a total sum of
$90,000 by the 10th year and $11,250 worth cash payments every year. Thus, the monthly cash returns and the
equity growth would have contributed an Internal Rate Of Return (IRR) of 15.9%, outperforming the average 10-
year S&P return of 13.9%*. While this is not a bad investment, the absolute return could have been substantial,
had the initial investment been bigger. Inevitably, you end up waiting for another ‘big’ opportunity to invest your
profits, and - until then - “settle” for mediocre single digit returns.
*S&P return sourced from NCREIF first quarter 2021 indices review document

Borrow to invest

Not everyone will have access to large amounts of cash for big investments though. Dipping into your emergency
funds for illiquid investments is not advised as that money should be A) liquid at all times and B) accessible at all
times. Instead, you can always consider borrowing money (at a reasonable rate) to invest. The resulting interest
payments can be serviced by the projected cash returns from the investment (keeping in mind the actual
proposed cash flow model). The resulting equity / capital growth at the end of the investment period will be larger
than if you had just used the cash you had on hand, increasing your overall return. The biggest benefit here is,
the absolute return is much higher than the earlier scenario.

Key features
1. High initial investment for high returns
2. Cash return compensates loan interests
3. Larger equity/capital at the end of holding
Amount borrowed Cash in hand period than from just using cash in hand

Initial investment amount

boosted by loan Invest in real estate

Let’s look at some numbers:

 Imagine you plan to invest about $300,000 on real estate that is expected to produce a cash return of
14% annually.
 While you invest $225,000 of your money, you may borrow the pending $75,000 at a reasonable
interest rate of say 7% with a maturity of 10 years.
 The monthly payment (Principal + Interest) against the loan stands at approximately $871 per month.
 Assuming a cash return of 14%, the $300,000 investment would generate cash inflow of $3,500 per
month. The monthly cash inflow will not only help you to service the interest payment but also help to
prepay the loan at an enhanced rate.

Chart 1: Loan amortization schedule

(Assuming money was borrowed in July-2021 (Month-0))

Total debt – $75,000; Interest rate – 7%; Maturity – 10 years; Total investment - $300,000
 $3,500 $75,000

$3,400
$60,000
$3,300

$45,000
$3,200

$3,100
$30,000

$3,000
$15,000
$2,900

$2,800 $-
1 3 5 7 9 1 3 5 7 9 1 3
h- h- h- h- h- -1 -1 -1 -1 -1 -2 -2
o nt o nt o nt o nt o nt n th n th n th n th n th n th n th
M M M M M o o o o o o o
M M M M M M M

Principal payment (LHS) Interest payment (LHS)

Debt Outstanding(RHS)

In this scenario, the cash returns more than compensate for the monthly payments and also help you to prepay
the loan in less than 2 years (as shown above).

Chart 2: Cumulative cash return (at 14%) and the breakeven time from investment,
post paying-off the debt (assuming money was borrowed in Month-0)
300,000

250,000

200,000

150,000
14%
100,000

50,000

0
2 7 2 7 2 7 2 7 2 7 2 7 2 7 2 7 2 7 02 07
-1 -1 -2 -2 -3 -3 -4 -4 -5 -5 -6 -6 -7 -7 -8 -8 -9 -9
n th nth nth nth nth nth nth nth nth nth nth nth nth nth nth nth nth nth th-1 th-1
o o o o o o o o o o o o o o o o o o n n
M M M M M M M M M M M M M M M M M M Mo Mo

As seen in chart-2, a $300,000 investment with guaranteed cash returns of 14% will help you to get your entire
initial investment back in just (break-even period) 7 years after paying-off the debt (9 years from initial
investment – Month 108 as shown above) and this duration reduces with higher cash return as shown in chart-2.
Cash inflow post the break-even period is just surplus cash for you to invest in other opportunities. Such a debt is
called a “smart debt”, which finances things that appreciate in value, unlike “bad debt” that people borrow to
“consume” such as a vacation or a luxury car.

“Smart debt” Considerations

In our example, the risk-reward equation is so attractive that you only need a minimum annual cash return of just
4-5% to at least service the monthly payments while having some margin surplus on the investment.

However, while the idea looks attractive on paper, this mode of investment is not for everyone. We propose a few
rules-of-thumb for investors who intend to consider this avenue:
1. Investments come with a risk. Do your research and be prepared for uncontrollable factors which may put
your entire investment at risk. Be sure you can cover your monthly payments even if the target investment
doesn’t pan out.
2. Better to not borrow for short-term trading or gambling bets as the payback is not structured.
3. Operate with a “margin of safety”, investing at a price lower than your estimated entry value. A good “margin
of safety” increases your comfort and safety level.

Right avenues to borrow

Banks and credit unions offer standard lending options though the time to funding could be frustrating depending
on membership status, paperwork, approvals or assessments. Credit cards are another option to access quick
cash, but the cash advance charges are typically very large and would likely wipe out any expected returns. A
quicker and viable new-age options are non-banking lenders that process and lend cash to people within a very
short time in their digital platforms. Paperwork and onboarding processes are less cumbersome and they offer
attractive options depending on the credit history of investors.

One such growing lender dedicated for the doctor community is Doc2Doc lending. We provide well qualified
borrowers with personal loans up to $75,000. We have a variety of lending options at attractive interest rates. If
you are interested, click here to complete your application in less than 3 minutes to check the rate at which you
qualify.

Note: We recommend that borrowers talk with a qualified financial professional to ensure that this is the right
strategy for them at this time.