I have a post planned on leverage next week so I don’t want to spend much time talking about it now. All I’ll say is using leverage responsibly is one of the easiest ways to get rich.
The best example I can think of is real estate. You either borrow to buy a bunch of REITs (which is my preferred method at this point), or you go out and buy yourself a rental house or two. Either way, the process is pretty similar. You use somebody else’s money to earn a return better than what they charge you, and pocket the difference.
In the world of personal finance, not many are cool with this. Many people have just gotten finished paying down debt, while others don’t have the investment knowledge needed to confidently pull off the move. Others just aren’t very good at math, or think that there’s no way the market is inefficient enough for a 3-4% spread to exist.
One of the issues is always going to be where can someone get the money to pull something like this off. Most people end up borrowing against their house, because that’s easier than getting into a timeshare presentation. Did you guys know they don’t even check if you have enough money to afford it?
That’s not such a bad idea, but the rate is a bit high. You’re looking at paying at least prime (2.7%) to borrow against your digs, and possibly as high as prime + 1%. If you’re borrowing money at 3.7%, you either have to accept a smaller spread, invest in riskier assets, or throw up your hands and decide you’re going to spend the money on hot dogs instead.
But there’s a different option. How about credit card arbitrage?
What the actual hell is credit card arbitrage?
Pretty much constantly, credit card companies are offering promotions to get you to sign up and spend your sweet, sweet cash with them. Sometimes they offer free points. Sometimes they’ll offer you something like a t-shirt at the baseball game. Or sometimes they’ll offer you a low interest rate on balance transfers.
The last one is what we’re most interested in. The MBNA Platinum Plus MasterCard is running a promotion where you can sign up for the card and then transfer your balance to it for 12 months at a 0% interest rate. After the year is over, you’re stuck paying 19.99%. There’s no annual fee on the card.
Here’s what you do. There’s a 1% charge for setting all this up, so you request a card for $10,100 to net $10,000. You’ll get a $100 gift card for being approved, so this nets out to no cost.
Remember to make the minimum payment, which is 1% of the balance each month. Again, if you have a decent savings rate, this isn’t a big deal.
You then have to figure out where to stick that money. If you’re feeling frisky, you can stick it in the stock market, maybe sticking to more conservative stocks. If you feel confident in being able to save up the $10,000 needed to pay it off over the next year, this might work for you.
Say you put the $10,000 into a Canadian REIT or preferred share that yields 6%. You’d have $600 at the end of the year in dividends, while hopefully the underlying value went up. Unless it tanks, you’d only be stuck covering a $500 or $1,000 loss at the end of the trial period, which should be pretty doable. For the most part those are assets that don’t move a whole hell of a lot.
If you buy an ETF with it, you’ll also get the benefit of not paying any commission to buy it, which is helpful.
For people who aren’t so badass, I’d recommend sticking the cash with Tangerine, which will pay you 2.4% interest for the first six months, dropping it down to 0.80% for the last half of the year. No, I’m not sure how they can afford it either. You’d average 1.6% over the whole year, which is about as good as you’re going to do in the guaranteed world.
And that’s it. You’d end up making anywhere from $160 to $600 for your trouble. You could then try to transfer the balance to another credit card once the year was up, assuming another credit card company was having the same promotion. Usually in Canada it’s just MBNA doing such things, so I wouldn’t hold my breath on that one.
That’s credit card arbitrage in a nutshell. It’s not the biggest of rewards, but hey. It’s practically guaranteed money, and you can always spice it up a bit if you’re an aggressive saver and you’re confident you’ll have the $8,800 needed to pay it off at the end of the year.