Is this investment opportunity problematic?
"It would have to be made as a ""gift"", and then the return would be a ""gift"" back to you, because you're not allowed to use a loan for a down payment. This is not to evade taxes.  This is to evade a credit check.  The problem is that banks don't like people to have too much debt.  The bank could void the loan and go after your friends for damages under certain circumstances, as this is a fraud on the bank.  Perhaps you might be guilty of conspiracy to commit fraud or similar.   I'm willing to assume for the sake of argument that there is zero chance of your friend not paying you back intentionally.  But even so, there are still potential problems.  What if your friends end up without the money to pay?  Worse, what if something happens to them?  This is an off-books transaction.  You couldn't make a claim against the estate, as there can't be a paper trail.  You'd be left out the money in those circumstances.   You'd both be safer if your friends saved up for the next opportunity rather than trying to grab this one.   An alternative would be to buy a share of their current rental house.  That would give them the necessary money and would give you paper showing your money.  It's not a gift, it's a purchase.  You'd have to pay capital gains tax on the 15% profit that they're promising you.  But you'd both be above board and honest." "Your Spidey senses are good. A good friend would not put you in such a position. It's simple, to skirt some issue (we'll get to that in a second) you are being asked to lie. All for a 15% return on your $$$$. <<< How much is that?  You can easily lend him the money, and have a better paper trail. But the bank is not going to like that, and requires this money from friends or family to be a gift. I've heard mortgage guys at the bank say ""It's just a formality, we need this paperwork to sell the loan to the investors."" These bankers belong in jail, or at least fired and barred from the industry. They broke the economy in 2008, and should be stopped from doing it again." If you can separate the following two points, and live with them. I think you are good to go ahead. Otherwise I would seriously recommend you to reconsider.  Are you willing to give out this much money help a friend assuming that you will never get it back? This is what it means to give a gift, don't let their current intentions distract you from this. Will you be happy to wait as long as it takes till he is able and willing to give you some money? Is it ok if this moment never occurs, or would you feel like the money belongs to you already? This is what it means to receive the promise of a gift, don't get distracted by the fact that you may have given them something before. I don't have a legal background, but if you actually give the money to him so he can buy a house, without demanding something in return, I would judge that you are at least morally ok. (And if the transaction is in cash and fully deniable, you are probably not going to face legal problems in practice). Adding to what others have said, if the mortgage for the new house is backed by the federal government (e.g., through FHA or is to be sold to Fannie Mae/Freddie Mac) you would be violating 18 USC § 1001, which makes making intentionally false statements to any agent or branch of the federal government a crime punishable by up to 5 years' imprisonment. The gift letter you are required to sign will warn you of as much. Don't do it, it's not worth the risk of prison time. "As an investment opportunity: NO. As a friendly assist with money you don't mind ever getting back, legal depending on amount. A few years back I was in the housing market myself and researching interest rates and mortgages.  For one property I was very interested in, I would need about $4K extra in liquid cash to complete the down-payment.  A pair of options I saw were a ""combo loan"" 15yr 4% interest for the house, 1yr 8% interest for the $4K.  Alternately, the ""bank of mom and dad"" could offer the 4K loan for a much lower rate. The giftable limit where reporting is not required was $12,000 at the time I did the review.  IRS requires personal loans to be counted as having interest at the commercial rate.  Thus an interest free loan of $10K with commercial interest rate of 1% (for easy math) would be counted as a gift of $10,100 for that calendar year. Disclaimer: Ultimately, I did not use this approach and did not have it subjected to a legal review." Every time I have loaned money to family members I have never gotten the money back. If they can't make the down payment, they should not be taking out the loan. It's a bad idea to loan money to friends, because when they can't pay you back (which might be forever) they avoid you. So, you lose both your money and your friends. If they own the old house outright, they can mortgage it to you. In many jurisdictions this relieves you of the obligation to chase for payment, and of any worry that you won't get paid, because a transfer of ownership to the new owner cannot be registered until any charge against a property (ie. a mortgage) has been discharged. The cost of to your friends of setting up the mortgage will be less than the opulent interest they are offering you, and you will both have peace of mind. Even if the sale of the old house falls through, you will still be its mortgagee and still assured of repayment on any future sale (or even inheritance). Complications arise if the first property is mortgaged. Although second mortgages are possible (and rank behind first mortgages in priority of repayment) the first mortgagee generally has a veto on the creation of second mortgages. it seems you have 3 concerns: "It would have to be made as a ""gift"", and then the return would be a ""gift"" back to you, because you're not allowed to use a loan for a down payment. I see some problems, but different ones than you do: One more question: is the market really hot right now? It was quite cold for the last few years."
"[4] Looks like a careless security breach and not intentional and [5] resulted in:  ""Microsoft says Windows Vista, Server 2008, 7, or Server 2008 R2, check Microsoft's online Certificate Trust List. The company has removed DigiNotar from this list, so Internet Explorer on those systems should already not trust the certificate. The company will issue a patch to remove it from Windows XP and Windows Server 2003."" - and that's death for the CA.  The whole CA system is problematic particularly with governments getting in bed with just about everything to do with communications. It's probably time to move to some kind of quorum based system where no single company is fully trusted to vouch for any entity to be what they claim to be." "'Note that ""to keep an investor from lowering their tax bill"" is not an explanation'. Well, yes it is. In fact  it is the only explanation. The rule plainly exists to prevent someone from realizing a loss when their economic situation remains unchanged before/after a sale. Now, you might say 'but I have suffered a loss, even if it is unrealized!' But, would you want to pay tax on unrealized gains? The tax system still caters to reducing the tax impact of investments, particularly capital investments. Part and parcel with the system of taxing gains only when realized, is that you can recognize losses only when realized. Are there other ways to 'artificially' reduce taxable income? Yes. But the goal of a good tax system should be to reduce those opportunities. Whether you agree that it is fair for the government to prevent this tax-saving opportunity, when others exist, is another question. But that is why the rule exists." Ultra-low rates can spur an unhealthy boon in M&amp;A deals/Corporate takeovers as management (defensively) and raiders (offensively) lever up cheaply to acquire companies. This can be problematic down the line when takeovers/large investments (that were funded with cheap debt) dont pan out and interest rates rise, and with it the cost of servicing that debt. Except: it's a material concern at every company.  If the senior executives all quit at the same time, this is going to be problematic no matter what company we're discussing.  I wouldn't be surprised if most 10-Ks have similar generic language. "I think it's hard to say. Companies are going to be much more likely to fail, but every now and then one will be knocked out of the park and become the next pintrest.  I do worry it will attract confidence men. It's easy to ""lose investor money to incompetence.""" ...is investing in a business you believe in a bad strategy?   I'm not saying you're going to be right with your investment (obviously your judgment is coming into play), but you make it sound like it's a terrible way to do things. Is it? "Sorry in advance, but this will be long.  Also, it sounds like your friend is a tool. I hope this ""friend"" is not also your financial advisor... they would be encouraging you to make a very poor investment decision. They also don't know how to do financial math.  For what it's worth, I am not wrong. I have correctly answered a set of changing questions as you have asked them... Your friend is answering based on a third, completely different investment model, which you proposed in the edit to your last post. If that's what you meant all along, then you should have been more clear in the questions you were asking.  Please let me layout the following: How the previous questions//investment proposals were built How to analyze this current proposal What your other option is Why the other option is best in a 'real world' market The First Question My understanding of the initial proposal was to take out a $10,000 loan, invest the proceeds, and expect to not have any money of your own tied up in this. Because that OP did not specify that this is an interest-only loan (you still haven't in any of your questions), the bank will require you to make payments back to them each month that include principal and interest.  Your ""friend"" is talking about the total interest paid being the only cost of a loan. While that is (almost) true, regardless of what your friend says, significantly more cash is involved in making sure that all the payments are made on time---unless you set up an interest-only loan. But with the set up laid out in this post, and with the assumptions I specified there, the principal payments must be included because the borrower has to pay back the bank and isn't not tying up any of their own money.  In that case, my initial analysis is correct--your breakeven is in the low teens for an annual required return.  The Second Proposal Your second proposal... before any edits... refined things a little bit, to try to capture the any possible returns by not selling something. As I indicated there, (with what was an exaggerating assumption), the lack of clarity makes for an outlandish required return.  The Second Proposal...with edits, or the one proposed above I will get to the one proposed above in a second, but first let me highlight a few problems with your friend's analysis.  Simple interest: the only place (in the US at least) that will lend with simple interest is student loans. Any loan that you actually take out will be compound interest.  Not an interest only loan: your ""friend"" is not calculating interest correctly. Since this isn't an interest-only loan, the principal balance will reduce every time you make a payment, by ~$320-$340 each month. This substantially reduces the total interest paid, to $272.79 over the total 24 months.  ""Returns"": I don't know what country, or what business your friend works in, but ""returns"" are a very ambiguous concept. Investopedia defines returns as gains or losses. (I wish I could inhabit the lala land that your friend lives in when returns are always positive). TheFreeDictionary.com defines a return for finance as ""The change in the value of a portfolio over an evaluation period, including any distributions made from the portfolio during that period.""  When you have not made it clear that any other money is being used in this investment plan (as was the case in scheme #1 and scheme #2a,) the loan still has to be paid. So, clearly the principal must be included in the return calculations.  How to evaluate this proposed investment scheme Key dimensions: Loan ($8,000 ... 24 months ... 0.27% monthly rate... monthly compounding... no loan origination fees) Monthly payment (PMT in Excel yields $344.70). Investment capital (starting = $8,000) Monthly Return (Investment yields... we hope it's positive!)  Your monthly contribution from your salary Taxes = 10%. Transaction Fees = $20  Go and lookup how to build an amortization table for a loan in Excel. Your life will be infinitely better for it.  Now, you get this loan set up and invested into something... (it costs $20 to buy the assets).  So you've got $7980 chugging away earning interest. I calculate that your break even, with you paying in $344.70 of your own money each month is 1.81% annually, or 3.42% over the 24 month life of this scheme. That is using monthly compound interest for the payments, because that's what the real world would use, and using monthly compounding of the investments' returns.  Your total interest expense would be $272.79.  This seems feasible. But let's talk about what your other option is, given that you're ready to spend $344.70 each month on an investment.  Your other option  I understand the appeal of getting $8,000... right away... to invest in something. But the risk behind this is that if the market goes down (and markets do) you're stuck paying a fixed amount for your loan that is now worth less money.  Your other option is to take your $344.70, and invest it step-by-step. (You would want to skip a month or two buying assets in the market, so that you can lessen transaction costs). This has two advantages: (1) you save yourself $272 in interest. (2) When the market goes down, you still win.  With this strategy, you still win when the market goes down because of what is commonly called ""dollar cost averaging"". When the market is up, your investments are also up. When the market goes down, your previous investments decrease in value but you can invest new money at the lower rates.  Why the step-by-step, invest your own money strategy is better At low rates (when you're looking for your break-even), the step-by-step model outperforms the loan. At higher rates of return (~4% + per year), you get the benefit of having the borrowed money earning more gains.  In fact, for every continuous (meaning set... not changing month-to-month) interest rate that you can dream up that is greater than about 4% per year, the borrowed money earns more.  At 10% per year, the borrowed money will earn about $500 more over the 2 years than your step by step investment would.  BUT I recognize that you might feel like the market will always go up. That's what everyone thinks. And that's alright.  But have one really bad month, or a couple of just-not-great-months, and your fixed 'loan' portfolio will underperform. Have a few really bad months, and your portfolio could be substantially reduced in value... but you would still be paying the same amount for it each month.  And if that happened (say your assets declined -3% in 3 of the 24 months...) You'd be losing money relative to the step-by-step portfolio." Sometimes invested capital is expected to earn interest, I've seen this be a stipulation in LLC operating agreements and Corporate bylaws. I thought this arrangement looks a little less than fair. BTW I'm a college freshman, though I do the finances for my parents' regulatory compliance and governance consulting company. Anyhow, that's just my two cents.