Borrowing money and then investing it — smart or nart?
The biggest concern is how you get $250,000 in unsecured credit. It's unlikely that you will be loaned that amount at a percentage lower than what you expect to earn. Unsecured credit lines are rarely lower than 10% and usually approach 20%. On top of that, for a bank to approve you for that credit line, you have to have a high credit score and an income to support the payments on that credit line. But lets suspend disbelief and assume that you can get the money you want on loan. You would then be expected to pay back that 10%, but investments don't go up uniformly. Some years they go up 15-20% and other years they go down 10%. What do you do if you have to sell some of your investments in a down year? That money is no longer invested, and you can't recover it with the following up year because you had to take too much out to cover the loan payments. You'll be out of money long before the loan is repaid because you can expect there will be bad years in the stock market that will eat away at your investment. There were a lot of people who took their money out of the market after the crash of 2008. If they had left their money in through 2009, they would have made all that money back, but if you have a loan to pay you have to pull money out in the bad years as well as the good years. Unless you have a lucky streak of all good years, you're doomed. I will use 10% of this 20K to pay the loan back on an annual basis agreement An annual payment of 0.8% ($2,000 / $250,000) is nowhere near large enough.  The interest alone is going to be well over $10,000 (and probably closer to $20,000 on an unsecured loan), so you need to plan for at least a $20,000 - $30,000 annual payment, depending on the terms (length and interest rate) on the loan.   But in general... is this sustainable/safe?  Essentially what you are doing is using leverage to increase the amount you can invest.  While this is fantastic when the market rises, it can go horribly wrong when the market goes down.  Generally it is unwise to fund a risky (meaning there are large swings in return) investment with a risk-free (meaning you'll always make a payment) loan. If you want to see what could happen, forecast a 20% market drop and see what you are left with (obviously you'll need to make the loan payment out of your balance since you won't have any gains to pull from).  An average of 10-12% over a long period of time is reasonable, but the variance can cause the return to be anywhere from -40% to +40% in one year.  Can you afford those losses?   Here's an actual example: If you were to invest $250,000 in the S&P 500 in January 2000 with an 8% interest-only loan, your next three years' returns would be: After three years, assuming an interest-only payment of $20,000, your balance would be just over $100,000, you'd still owe $250,000, and you'd still be making $20,000 in interest payments.  If your loan interest rate was 25% (which is not unreasonable for an unsecured loan), you'd be bankrupt after 3 years - you'd still owe $250K but could not make the interest payment. No, this is not a good idea.  The only time you should borrow money to invest in when you have control over the returns.  So if you wanted to start your own business, had a stable business plan, and had much more certainty over the returns, the borrowing money might be plausible.   But borrowing money to do passive investment is a huge mistake. "Theory of Levered Investing Borrowing in order to increase investment exposure is a time-honored and legitimate activity.  It's the optimal way to increase your exposure, according to finance theory (which assumes you get a good interest rate...more on this later).  In your case it may or may not be a good idea.  Based on the information in your post, I believe that in your case it is not a good idea.  Consider the following concerns. Risk In finance, reward comes with risk and in no other way.  Investing borrowed money means there is a good (not small) chance that you will lose enough money that you will need to pull significant wealth from your own savings in order to make up the difference.  If you are in a position to do this and OK with that possibility, then proceed to to the next concern.  If losing a lot of money means financial calamity for you, then this is a bad idea.  You haven't described your financial situation so I don't know in which camp you fall.  If the idea of losing, say, $100K means complete financial failure for you, then the strategy you have described simply has too much risk. Make no mistake, just because the market makes money on average does not mean it will make money, or as much money as you expect, over your horizon.  It may lose money, perhaps a lot of money. Make sure this idea is very clear in your mind before taking action. Rewards Your post implies that you think you can reliably get 10%-12% on an investment. This is not the case.  There are many years in which a reasonable portfolio makes this much or more, but on average you will earn less. No ones knows the true long-term market risk premium, but it is definitely less than 10%.  A better guess would be 6.5% plus whatever the risk-free rate is (currently about 0%).  Buying ""riskier"" investments means deviating from the optimal portfolio, meaning you took on more risk than is justified by how much extra money you expect to make.  I never encourage people to invest based on optimistic or unrealistic goals.  If anything, you should be conservative about how you expect things to go.  And remember, these are averages. Any portfolio that earns 10%-12% also has a very good chance of losing 25% or more.  People who sell or give advice on investments frequently get you charged up by pointing at times and investments that have done very well.  Unfortunately, we never know whether the investments and time period in which we are investing will be a good one, a bad one, or an unexciting one.  The reality of investing is...well, more realistic than what you have described. Costs I can't imagine how you could borrow that much money and only have an annual payment of $2000 as you imply--that must be a mistake.  No individual borrows at a rate significantly below 1%.  It sounds like it's not a collateralized loan of any kind, so unless you are some kind of prime-loan customer, your interest rate will be significant.  Subtract whatever rate you actually pay from 6.5% to get a rough idea of how much you will make if things go as well as they do on average.  You will pay the interest whether times are good or bad. If your rate is typical of noncollateralized personal loans, there's a good chance you will lose money on average using the strategy you have described.  If you are OK with taking risk with a negative expected return, consider a trip to Las Vegas.  It's more exciting. Ethics I'm not one to make people feel guilty for doing things that are legal but of questionable morality.  If that's the case and you are OK with it, more power to you. I'm not sure under what pretense you expect to obtain the money, but it sounds like you might be crossing legal lines and committing actual crimes (like fraud).  Make sure to check on whether what you intend is a white lie or something that can get you thrown in prison. For example, if you are proposing obtaining a subsidized education loan and using it for speculation, I could easily see you spending serious time in prison and permanently ruining your life, even if your plan works out.  A judge and 12 of your peers are not going to think welfare fraud is a harmless twist of the truth. Summary I've said a lot of negative things here.  This is because I have to guess about your financial situation and it sounds like you may have unrealistic expectations of the safety and generosity of investing.  Quite frankly, people for whom borrowing $250K is no big deal don't normally come and ask about it on StackExchange and they definitely don't tend to lie in order to get loans.  Also $18K a year doesn't change their quality of life. However, I don't know.  If $250K is small relative to your wealth and you need a good way to increase your exposure to the market risk premium, then borrowing and investing may well be a good idea." There are two fundamental flaws to your plan: Supposing that you can get a loan with an interest rate that is less than the profit you are likely to get from an investment. Historically, the U.S. stock market goes up by 6 to 7% per year. I just did a quick check and found rates for unsecured loans of 10 to 15%. Of course interest rates vary depending on your credit rating and all sorts of other factors, but that's probably a reasonable ball park. Borrowing money at 15% so you can invest it at 6% is not a good plan. Of course you could invest in things that promise higher returns, but such investments have higher risks. If there was a super safe investment that was virtually guaranteed to give 20% profit, the bank wouldn't loan you money at 10 or 15%: they'd put their money in this 20% investment. I don't know what your income is, but unless it's substantial, no one is going to give you an unsecured loan for $250,000.  In your question you say you'll use $2,000 of your profits to make payments on the loan. That's less than 0.8% of the loan amount. If you really know a bank that will loan money at 0.8%, I'm sure we'd all like to hear about it. That would be an awesome rate for a fully secured loan, never mind for a signature loan. $250,000 for 10 years at 10% would mean payments of $3,300 per MONTH, and that's about the most optimistic terms I can imagine for a signature loan. You say you plan to lie to the bank. What are you going to tell them? A person doesn't get to be a bank loan officer with authority to make $250,000 loans if he's a complete idiot. They're going to want to know what you intend to do with the money and how you plan to pay it back. If you're making a million dollars a year, sure, they'll probably loan you that kind of money. But if you were making a million dollars a year I doubt you'd be considering this scheme. As TripeHound said in the comments, if it was really possible to get bigger returns on an investment than you would have to pay in interest on an unsecured loan, then everybody would be doing it all the time. Sorry, if you want to be rich, the realistic choices are, (a) arrange to be born to rich parents; (b) win the lottery; (c) get a good job and work hard. It's incredibly foolish because it fails to use the investments as collateral to secure the loan. So instead of paying 5% or less for a loan secured by liquid assets, you'll be paying 10% or more for an unsecured loan. I do leveraged investments all the time and make a reasonable amount of money doing it (at high risk, I concede). I always use the investment to secure the loan and, as a result, pay a very low interest rate (since the lender can sell of my investments if I fail to repay the loan, reducing their risk dramatically). An unsecured loan would cost several times more.
Your urge to invest is a good one. If you don’t invest your money, you're probably leaving about two thirds of it on the table. By the time you need the money (without knowing your exact future withdrawals, and taking national averages into consideration), investing would have grown it by three times.  As far as how much money you should invest...I invest everything I'm not going to use in the next month or two. My advisor is able to monitor my bank accounts and sweep any unused cash into investment accounts. Using AI, they're able to figure out exactly which days I'll be needing cash then put it back in my accounts before I need it. 1% of my portfolio is always kept in cash, for emergencies. With investing, there are lots of things to consider. You need to decide what to invest in - spread your money over many different asset classes - monitor market trends - have a plan for market ups and downs - regularly rebalance - maneuver the fun world of taxes.  Basically - asset management.  Vanguard mutual funds are an easy, affordable way to spread your money over many different assets, but they don't offer much when it comes to asset management. I'd suggest you find a flat fee advisor (no more than 1% of your managed assets) who listens to you, determines your goals, creates a plan based on upon, then executes it with no commission or execution costs. In this particular vein, robo advisors are the best bet. I don't want to come across like I'm selling something, however, I have had much satisfaction with online digital advisors. Hope this helps. "Two things to consider: When it comes to advice, don't be ""Penny wise and Pound foolish"". It is an ongoing debate whether active management vs passive indexes are a better choice, and I am sure others can give good arguments for both sides. I look at it as you are paying for advice. If your adviser will teach you about investing and serve your interests, having his advise will probably prevent you from making some dumb mistakes. A few mistakes (such as jumping in/out of markets based on fear/speculation) can eliminate any savings in fees. However, if you feel confident that you have the resources and can make good decisions, why pay for advise you don't need? EDIT In this case, my opinion is that you don't need a complex plan at this time. The money you would spend on financial advise would not be the best use of the funds.  That said, to your main question, I would delay making any long-term decisions with these funds until you know you are done with your education and on an established career path. This period of your life can be very volatile, and you may find yourself halfway through college and wanting to change majors or start a different path. Give yourself the option to do that by deferring long-term investment decisions until you have more stability. For that reason, I would avoid focusing on retirement savings. As others point out, you are limited in how much you can contribute per year. If you want to start, ROTH is your best bet, but if you put it in don't pull it out. That is a bad habit to get into. Personal finance is as much about developing habits as it is doing math... A low-turnover index fund may be appropriate, but you don't want to end up where you want to buy a house or start a business and your investment has just lost 10%...  I would keep at least half in a liquid, safe account until after graduation. Any debt you incur because you tied up this money will eliminate any investment gains (if any). Good Luck! EDITED to clarify retirement savings" While others have made a good case for how you may want to save and spend I just want to take a moment to comment on Acorn and Robinhood.  Having never used either of them, I would stick to the seasoned professionals for my long term investment relationship. I'm sure they have the right licensing and proper SIPC coverage etc, but I wouldn't, personally, trust my money to an entity that's almost entirely funded by venture capital.  I would stick to a company that exists and is profitable on it's own.  All of the major brokerage houses (Vanguard, Schwab, ETrade, Scottrade, etc) in the US give account holders access to a list of ETFs and Mutual Funds with zero load on deposits, no or low minimum account balances, no or low investment minimums, and no commissions.  With access to these no cost options, I wouldn't waste time with an entity that exists because of it's investor fund raising abilities. "(Congrats on earning/saving $3K and not wanting to blow it all on immediate gratification!) I currently have it invested in sector mutual funds but with the rise and fall of the stock market, is this really the best way to prepare long-term? Long-term?  Yes! However... four years is not long term.  It is, in fact, borderline short term.  (When I was your age, that was incomprehensible too, but trust me: it's true.) The problem is that there's an inverse relationship between reward and risk: the higher the possible reward, the greater the risk that you'll lose a big chunk of it. I invest that middle-term money in a mix of junk high yield bond funds and ""high"" yield savings accounts at an online bank.  My preferences are HYG purchased at Fidelity (EDIT: because it's commission-free and I buy a few hundred dollars worth every month), and Ally Bank." "Diversify between high risk, medium risks investments as well as ""safe"" ones like bonds authored directly from the EU.  All in all you re much better off than lending money to the bank through a savings account for no more than 1% in interest rate(given the current NL situation).  Congratulations on becoming financially independent(your investments covering your living expenses) in as low as 9-15years from now." I agree with the advice given, but I'll add another angle from which to look at it. It sounds like you are already viewing the money used to either pay off the loan early or invest in the market as an investment, which is great. You are wise to think about opportunity cost, but like others pointed out, you are overlooking the risk factor. The way I would look at this is: I could take a guaranteed 6.4% return by paying off the loan or a possible 7% return by investing the money.  If the risk pays off modestly, all you've done is earned 0.6%, with a huge debt still hanging over you. Personally, I would take the guaranteed 6.4% return by paying off the debt, then invest in the stock market. Now this is looking at the investment as a single, atomic pool of money.  But you can split it up a bit.  Let's say the amount of extra disposable income you want to invest with is $1,000/mo.  Then you could pay an extra $500/mo to your student loan and invest the other $500 in  the stock market, or do a 400/600 split, or whatever suits your risk tolerance. You mentioned multiple loans and 6.4% is the highest loan.  What I would do, based on what I value personally, is put every extra penny into paying off the 6.4% loan because that is high.  Once that is done, if the next loan is 4% of less, then split my income between paying extra to it and investing in the market. Remember, with each loan you pay off, the monthly income that previously went to it is now available, and can be used for the next loan or the other goals. I would read any and all of the John Bogle books.  Essentially:  We know the market will rise and fall.  We just don't know when specifically.   For the most part it is impossible to time the market. He would advocate an asset allocation approach to investing.  So much to bonds, tbills, S&P500 index, NASDAQ index.  In your case you could start out with 10% of your portfolio each in S&P500 and NASDAQ.  Had you done that, you would have achieved growth of 17% and 27% respectively.  The growth on either one of those funds would have probably dwarfed the growth on the entire rest of your portfolio.  BTW 2013 and 2014 were also very good years, with 2015 being mostly flat. In the past you have avoided risk in the market to achieve the detrimental effects of inflation and stagnant money.  Don't make the same mistakes going forward. "Which option will save you the most money in the long run? That is tough. Assuming you stay healthy, don't lose your job, don't experience a pay cut or any major emergency that drains your savings, then applying the $6000 to the higher interest loan will save you more money in the long run. However, the difference in savings is a few hundred dollars. Not much really. So, in this case, I'd put the $6k towards the smaller loan. Why? Because then you'd pay it off faster. Once that's done, you open up your cash flow by the minimum monthly payment you would have had on that loan.  Assuming they both have the same or similar number of months left, by paying the smaller loan off sooner, you'd open up $X month, where $X is your minimum monthly payment. This could be useful to you if you want to take on some other debt (like buying a house) because it lowers your debt to income ratio. If you put that money towards the higher loan, your DTI won't change until the normal time you would have paid off the smaller loan. Even if you are not looking to purchase anything that requires you to have a lower DTI, paying the smaller loan off sooner increases your cash flow sooner (because your monthly payment on the higher loan doesn't change just because you lowered the balance by $6k). So you'd be more robust to emergencies if your current income doesn't allow for much savings. A major emergency could wipe out all savings from paying down the bigger balance. So, I'd suggest: Edit: TripeHound asked a question, pretty much requesting more details for why I was biased towards paying off the smaller loan first. What follows is my response, with a bit of reorganization: Typically, people asking these questions don't have so much wealth that ""which loan to pay first?"" is an academic question. They need to make smart financial decisions. While paying the highest interest loan saves the most money in interest - that only occurs under the assumption that nothing bad will ever happen to you until the loans are paid off. In reality, other things happen. Tires blow out, children get sick, you get laid off and so the ""best"" thing to do is the one that maximizes your long term financial health, even if it comes at the expense of a few $k more interest. Each loan has a minimum monthly payment. Let's assume, barring any windfalls of additional cash, you will just make the minimum payments each month towards a loan. If you pay off the smaller loan first, that increases your available monthly cash flow. At that point, you can put extra towards the other loan. However, if an emergency should come up, or you need to save for a vacation, you can do that, without negatively impacting the second loan, because you'd just drop back to its minimum payment. Putting the money towards the higher balance loan would mean it takes you longer to reach this point as the time to reach payoff on the first loan will not change ($6k only reduces the $25.6k loan to $19.6k) so you never gain the flexibility of additional cash flow until the time you would have paid off the $13.5k originally. I'd rather have a few hundred dollars each month that I can choose to use to make additional loan payments, eat out, pay for car repairs, pay for emergencies than be forced to dip into credit or worse, pay day loans, should an emergency happen." "You're talking about modern portfolio theory. The wiki article goes into the math. Here's the gist: Modern portfolio theory (MPT) is a theory of finance that attempts to maximize portfolio expected return for a given amount of portfolio risk, or equivalently minimize risk for a given level of expected return, by carefully choosing the proportions of various assets. At the most basic level, you either a) pick a level of risk (standard deviation of your whole portfolio) that you're ok with and find the maximum return you can achieve while not exceeding your risk level, or b) pick a level of expected return that you want and minimize risk (again, the standard deviation of your portfolio). You don't maximize both moments at once. The techniques behind actually solving them in all but the most trivial cases (portfolios of two or three assets are trivial cases) are basically quadratic programming because to be realistic, you might have a portfolio that a) doesn't allow short sales for all instruments, and/or b) has some securities that can't be held in fractional amounts (like ETF's or bonds). Then there isn't a closed form solution and you need computational techniques like mixed integer quadratic programming Plenty of firms and people use these techniques, even in their most basic form. Also your terms are a bit strange: It has correlation table p11, p12, ... pij, pnn for i and j running from 1 to n This is usually called the covariance matrix. I want to maximize 2 variables. Namely the expected return and the additive inverse of the standard deviation of the mixed investments. Like I said above you don't maximize two moments (return and inverse of risk). I realize that you're trying to minimize risk by maximizing ""negative risk"" so to speak but since risk and return are inherently a tradeoff you can't achieve the best of both worlds. Maybe I should point out that although the above sounds nice, and, theoretically, it's sound, as one of the comments points out, it's harder to apply in practice. For example it's easy to calculate a covariance matrix between the returns of two or more assets, but in the simplest case of modern portfolio theory, the assumption is that those covariances don't change over your time horizon. Also coming up with a realistic measure of your level of risk can be tricky. For example you may be ok with a standard deviation of 20% in the positive direction but only be ok with a standard deviation of 5% in the negative direction. Basically in your head, the distribution of returns you want probably has negative skewness:  because on the whole you want more positive returns than negative returns. Like I said this can get complicated because then you start minimizing other forms of risk like value at risk, for example, and then modern portfolio theory doesn't necessarily give you closed form solutions anymore. Any actively managed fund that applies this in practice (since obviously a completely passive fund will just replicate the index and not try to minimize risk or anything like that) will probably be using something like the above, or at least something that's more complicated than the basic undergrad portfolio optimization that I talked about above. We'll quickly get beyond what I know at this rate, so maybe I should stop there." The advice you were given in the other question was don't do it. The math is not the issue. The interest structure is not the issue. But there is a significant chance that you could lose money on the deal. If you invested your money in a NASDAQ heavy position in January 2000, you are still waiting to break even in November of 2013; Invest in almost anything in August 2001 and you will be down for a long time. Invest just before the housing collapse in 2007 and only now returning back to where you were. If you take money on a monthly basis and invest it you will be better off.  If want to get the loan; then set up a stream of money into a bank account to make sure that when payments are due you have the cash to do so. When the two years are up you will have cash to repay the loan, and no need to sell the investments. Also if you are a bad judge of investments you won't have a problem repaying the loan. Using a loan to purchase stock reduces your gains and increases your losses. Use the power of Dollar cost averaging by making periodic purchases. "Wow, this turns out to be a much more difficult problem than I thought from first looking at it. Let's recast some of the variables to simplify the equations a bit. Let rb be the growth rate of money in your bank for one period. By ""growth rate"" I mean the amount you will have after one period. So if the interest rate is 3% per year paid monthly, then the interest for one month is 3/12 of 1% = .25%, so after one month you have 1.0025 times as much money as you started with. Similarly, let si be the growth rate of the investment. Then after you make a deposit the amount you have in the bank is pb = s. After another deposit you've collected interest on the first, so you have pb = s * rb + s. That is, the first deposit with one period's growth plus the second deposit. One more deposit and you have pb = ((s * rb) + s) * rb + s = s + s * rb + s * rb^2. Etc. So after n deposits you have pb = s + s * rb + s * rb^2 + s * rb^3 + ... + s * rb^(n-1). This simplifies to pb = s * (rb^n - 1)/(rb - 1). Similarly for the amount you would get by depositing to the investment, let's call that pi, except you must also subtract the amount of the broker fee, b. So you want to make deposits when pb>pi, or s*(ri^n-1)/(ri-1) - b > s*(rb^n-1)/(rb-1) Then just solve for n and you're done! Except ... maybe someone who's better at algebra than me could solve that for n, but I don't see how to do it. Further complicating this is that banks normally pay interest monthly, while stocks go up or down every day. If a calculation said to withdraw after 3.9 months, it might really be better to wait for 4.0 months to collect one additional month's interest. But let's see if we can approximate. If the growth rates and the number of periods are relatively small, the compounding of growth should also be relatively small. So an approximate solution would be when the difference between the interest rates, times the amount of each deposit, summed over the number of deposits, is greater than the fee. That is, say the investment pays 10% per month more than your bank account (wildly optimistic but just for example), the broker fee is $10, and the amount of each deposit is $200. Then if you delay making the investment by one month you're losing  10% of $200 = $20. This is more than the broker fee, so you should invest immediately. Okay, suppose more realistically that the investment pays 1% more per month than the bank account. Then the first month you're losing 1% of $200 = $2. The second month you have $400 in the bank, so you're losing $4, total loss for two months = $6. The third month you have $600 in the bank so you lose an additional $6, total loss = $12. Etc. So you should transfer the money to the investment about the third month. Compounding would mean that losses on transferring to the investment are a little higher than this, so you'd want to bias to transferring a little earlier. Or, you could set up a spreadsheet to do the compounding calculations month by month, and then just look down the column for when the investment total minus the bank total is greater than the broker fee. Sorry I'm not giving you a definitive answer, but maybe this helps." "I don't know whether you'd consider buying a single bond instead of a fund. Strips are Treasuries where the coupons have been ""stripped"" to produce debt instruments with a fixed maturity date. They pay zero interest. Their value comes from the fact that you buy them at a price less than 100 and they are worth exactly 100 at some point in the future. You can buy them with any year/month that you wish. They are backed by the federal government and are considered to have no default risk. Like most bonds the price is actually a percentage and they mature at a 100. The one that expires 9/30/2018 costs 91.60 and returns 100 on the expiration date. The price list is here There's more information about them here First of all, they are still T-bonds (in all but the most legalistic   sense) which means they are the safest, most risk-free investment   possible. The U.S. federal government has stellar credit and a record   of never defaulting. These bonds have no call features, so the timing and distribution of   bond payments cannot be altered by any foreseeable occurrence. They are sold at a known - and generally deep - discount off a known   face value that can be redeemed at a known date, so buyers know   exactly how much they will earn from an investment in STRIPS." Yeah, after considering your advice from before, I did a bit of research, and I see that the market average return each year is about 7%, which beats the rate at which my car is financed by 2% and my student loans by 1%, so maybe I should be less concerned about paying those down and more concerned about starting to invest well. Again, your advice is very much appreciated. I am voting you up because this is a legitimate question with a correct possible answer. Yes, you shouldn't buy penny stocks, yes you shouldn't speculate, yes people will be jealous that you have money to burn. Your question: how to maximize expected return. There are several definitions of return and the correct one will determine the correct answer. For your situation, $1,000 sounds like disposable income and that you have the human capital to make more income in the future with your productive years. So we will not assume you want to take this money and reinvest the remains until you are dead. This rules out #2. It sounds like you are the sole beneficiary of this fund and that your value proposition is regardless of asset class and competition to other investment opportunities. In other words, you are committed to blowing this $1,000 and would not consider instead putting the money towards paying down credit card debt or other valuable uses. This rules out #3. You are left with #1, expected value. Now there is already evidence that penny stocks are a losing proposition. In fact, some people have been successful in setting up honeypot email accounts and waiting for penny stock spam... then shorting those stocks. So to maximize expected return, invest 0% of your bankroll. But that's boring, let's ignore it. As you have correctly identified, the transaction costs are significant, $14 in tolls on crossing the bridge both ways on a $1,000 investment already exceeds the 5-year US bond rate. Diversification will affect the correlation and overall risk (Kelly Criterion) of your portfolio -- but it has no effect on your expected return.  In summary, diversification has zero effect on your expected return and is not justified by the cost. "The problem here can be boiled down to that fact you are attempting to obtain a loan without collateral.  There are times it can be done, but you have to have a really good relationship with a banker.  Your question suggests that avenue has been exhausted. You are looking for an investor, but you are offering something very speculative.  Suppose an investor gives you 20K, what recourse does he have if you do not pay the terms of the loan?  From what income will this be paid from?  What event will trigger the capability to make a balloon payment?    Now if you can find a really handy guy that really needs a place to live could you swap rent for repairs?  Maybe.  Perhaps you buy the materials, and he does the roof in exchange for 6 months worth of rent or whatever. If you approached me with this ""investment"", the thing that would raise a red flag is why don't you have 20K to do this yourself?  If you don't how will you be able to make payments?  For example of the items you mentioned: That is a weekend worth of work and some pretty inexpensive materials.  Why does money need to be borrowed for this? A weekend worth of demo, and $500 worth of material and another weekend to build something serviceable for a rental.  Why does money need to be borrowed for this? 2K?  Why does money need to be borrowed for this? This can be expensive, but most roofing companies offer financing.  Also doing some of the work yourself can save a ton of money.  Demoing an old roof is typically about 1/3 of the roofing cost and is technically simple, but physically difficult. So besides the new roof, you could have a lot of your list solved for less than 3K and three weekends worth of work.  You are attempting to change this into a rental, not the Taj Mahal."