Is this a form of hypothecation?

Hello, Everyone.

What would be the legal/technical term for this?

I borrow $25K from my uncle at 6% simple interest (his savings account is only paying him 4%). Then, I put the money into a moderately aggressive mutual fund with a history of averaging 10-12% returns annually.

Is this a type of hypothecation? Would it be considered some kind of arbitrage?

How can I learn more about this type of investing? Didn't a guy named Gary North have a book out on this?

Thank you All for your help. -- Thomas

Hi Thomas,

I don't think hypothecation is the best term to use to describe what you are looking to do. It's based on the word Hypothetical. This is not a reassuring word when it comes to the world of finance. It is also a rather antiquated term that has to do with securing funds with a pledge of property as collateral.

I'm more certain that what you are trying to do is a self-liquidating (arbitrage) loan. Arbitrage in its most basic sense means buying low, and selling high.

In your stated situation, you're looking to "buy" the loan at 6% and "sell" it for 12%. Let's do a little math. Six percent of $25,000 is $1,500 ($26,500). Twelve percent of $25,000 is $3,000 ($28,000). Once you've repaid the Principal + Interest at 6% ($26,500) your profit would be $1,500 ($28,000 minus $26,500). Is the time it takes for this to mature worth $1,500 to you? Is it worth an additional $500 dollars to your uncle? (4% vs. 6%) Is the financial vehicle you propose to use safe enough? Can you back up your loss if it fails? Only you can judge.

I’m not trying to scare you off from self-liquidating loans. These types of loans can be done successfully, but you have to know what you're doing.

Recommended Reading :
If you really want to learn exactly how you can profit with self-liquidating loans in your home town, click on the link below to get Jim Straw's book on the subject.


Tim

Thanks, Tim, for replying.

I read Mr. Straw's writings many years ago on this topic. I bought it through the mail. :-) I think I'll go and dig it out.

But, if I can, let me ask you: is that what I'm describing here?

Now, follow my reasoning...What's the difference between doing something like I'm describing here and taking the same money and buying paper (a discounted mortgage)? Or, buying a duplex? The income from these investments would go towards repaying my uncle too, right?

I was just trying to do the same thing with "pure paper", so to speak, in an attempt to avoid the management hassles that can come with real estate investments.

I look forward to your insights, and those of others. Please, correct my thinking if it is flawed.

Thanks again. -- Thomas

Hi Thomas,

I don’t want to get into a battle of semantics. I believe “self liquidation arbitrage loans” best describes what you first proposed to do. Buy low and sell high, and profit from the difference. If you wish to call it something else, you are at liberty do so. Here’s a link that clarifies what exactly what a self liquidation arbitrage loan is:

“…It’s a loan where you profit from the spread between interest rates. You can get a loan and make money through some arbitrage and hedging. This is absolutely legal under international banking rules”

http://www.eagletraders.com/loans/arbitrage.htm

The difference between working the money with paper or property is risk, real or perceived. Almost all property can be insured for loss while most investments vehicles cannot.

Self liquidating loan arbitrage can very profitable when done correctly.

For those who have never heard of self liquidation arbitrage loans, click on the link below to get Jim Straw’s book. It’s ready for immediate download in .PDF format.

Tim Thach