The Borrow Smart Chronicles - Borrowing To Invest?

You didn't want a 9-to-5 job. You wanted freedom, control, and unlimited potential. So, you became a mortgage lender. Now, your work hours aren't defined by the clock; your passion and ambition define them.

Loan officers who step into the entrepreneurial world understand this better than anyone. You traded the security of a structured schedule for the limitless possibilities of a 24/7 grind with unlimited income potential. And yes, it’s demanding. But it’s also exhilarating.

Here’s the truth: Success isn’t about working less; it’s about working smarter and loving what you do - being more effective. The lines between work and personal life blur, but that’s because you’re not just working a job—you’re building a legacy for yourself and your family.

Embrace the chaos, the late nights, and the weekends spent grinding because every extra hour you put in is an investment in your future. What you learn compounds, just like interest. It is not the hour that counts, but how you invest that hour. The freedom, the control, and the success you achieve are all worth it, but you’ll need to invest an hour or TWO each week into dedicated practice at getting better, at being more effective.

Keep pushing. Keep hustling. Your future self will thank you.Stay relentless. 💪

Push out your boundary of ignorance every day, because rust never sleeps!

a BORROW SMART CONCEPT
Borrowing to Invest?

New loan officers calling on advisors find that financial advisors are often concerned that their clients will borrow money to invest. There is no specific regulation that outright prohibits a consumer from borrowing money from their house to invest in securities. However, there are regulations and rules in place that govern the borrowing process and the associated risks to protect both the borrower and the financial system. These regulations typically focus on margin trading, which is the practice of borrowing money from a broker to buy securities.

Key regulations include:

### 1. Regulation T (Reg T)

Issued by the Federal Reserve Board, Regulation T governs the amount of credit that brokers and dealers can extend to customers for the purchase of securities. It sets the initial margin requirement, which is the minimum amount of equity that must be deposited by the customer to purchase securities. As of now, Reg T generally requires that customers deposit at least 50% of the purchase price of the securities.

### 2. FINRA Rule 4210

The Financial Industry Regulatory Authority (FINRA) has established Rule 4210, which outlines maintenance margin requirements. This rule dictates the minimum amount of equity that must be maintained in a margin account after the purchase of a security. The typical maintenance margin requirement is 25%, but it can be higher for certain securities.

### 3. SEC Regulation SHO

This regulation, enforced by the Securities and Exchange Commission (SEC), deals with short sales and requires brokers to locate and borrow securities before selling them short. This indirectly impacts the borrowing to invest as it ensures the stability and liquidity of the securities market.

### 4. Dodd-Frank Wall Street Reform and Consumer Protection Act

While not specifically prohibiting borrowing to invest, the Dodd-Frank Act introduced various regulations to improve the stability of the financial system. It increased oversight and introduced measures to reduce risky behavior, indirectly affecting margin lending and borrowing practices.

### Key Points to Consider:

- Risk of Leverage: Borrowing to invest (leveraging) can amplify gains but also significantly increase losses.

- Brokerage Requirements: Different brokers may have additional requirements or limits on borrowing for investment purposes.

- Creditworthiness: Lenders will assess the creditworthiness of borrowers before extending credit for investments.

### Example Scenario from a recent CLA:

A client has just over $100,000 in credit card debt at close to 22%. They have an outstanding mortgage of $300,000 at 4%. What is their actual cost of borrowing overall - their EPR? It is 8.5%. This client had a house worth $1,200,000. They wanted to take out a new loan of $500,000 at 6.75% to pay off their credit card debt of $100,000, pay off their existing mortgage of $200,000, and free up $200,000 to invest in their retirement account. The advisor said they can’t do that, but that is not true, they can. They are eligible to do so. Where that is suitable for them to do so is a different question.

If the advisor is concerned, you can look to use the loan for replacement funds… In our example, let’s say the client has $200,000 across various other investments - a money market account and checking and saving accounts. They can invest that $200,000 with the advisor, and then use the cash out of the loan to ‘replace’ those funds… this way there is no concern that the client used mortgage proceeds to invest. They could later set up a HELOC for $200,000 to give them liquidity if they need money, and invest that $200,000 into more aggressive higher return opportunities.

While there is no outright ban, these regulations are designed to ensure that investors understand the risks and have the financial capability to manage potential losses. VERY IMPORTANT: I am not saying clients should borrow from their house to invest, quite the opposite. I’m saying that to say that a financial advisor won’t talk to a lender about liability management because they are worried the client might borrow from the house to invest is akin to malpractice.

For more detailed information, you can refer to the official documents on the Federal Reserve Board, FINRA, and SEC websites.

LIABILITIES and DEBT
What’s Happening?

REAL ESTATE
What’s Happening?

ASSETS and INCOME
What’s Happening?

ON BEING HUMAN
What’s Worth Sharing?

"In every challenge or even tragedy, there is an opportunity. And if you train yourself to look for the opportunity, you will be able to take control of the situation and even turn it into a positive or if it can't be turned into something good, at least something good could come out of it." Rabbi Menachem Mendel Schneerson

“Live each season as it passes; breathe the air, drink the drink, taste the fruit, and resign yourself to the influences of each.” - Henry David Thoreau

DOPAMEMES
And Other Happy Moments…

Artificial Intelligence
And the Future of Work…

Fun idea for your clients - take a photo of their house and send it to them as a coloring page for their kids to color!

Train the image generator on a style you like:
https://www.everart.ai/

Use AI to visualize a House Renovation:
https://renovateai.app/

Create bombbombs with a script and you as the character:
https://www.heygen.com/

Robot building car in SC:
https://interestingengineering.com/innovation/us-figure-humanoid-start-operations-at-bmw-plant

ChatGPT Prompt Idea:
Compose a thorough and organized one-page report detailing the historical evolution of housing. Your report should cover the advantages and obstacles faced by consumers wanting to buy their first house, and anticipated trends and forecasts for the future of the first-time home buyer. Please answer in a structured way to enhance readability.

Borrow Smart University || National Institute of Financial Education