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."
3-5 years is long enough of a timeframe that I'd certainly invest it, assuming you have enough (which $10k is).  Even conservatively you can guess at 4-5% annual growth; if you invest reasonably conservatively (60/40 mix of stocks/bonds, with both in large ETFs or similar) you should have a good chance to gain along those lines and still be reasonably safe in case the market tanks.   Of course, the market could tank at any time and wipe out 20-30% of that or even more, even if you invest conservatively - so you need to think about that risk, and decide if it's worth it or not.  But, particularly if your 3-5 year time frame is reasonably flexible (i.e., if in 2019 the market tanks, you can wait the 2-3 years it may take to come back up) you should be investing. And - as usual, the normal warnings apply.  Past performance is not a guarantee of future performance, we are not your investment advisors, and you may lose 100% of your investment... "There will be many who will judge your proposal on the idea that subsidized loans should be available to those who need them, and should not be used by others who are simply trying to profit from them. Each school has a pool of money available to offer for subsidized and unsubsidized loans. If they are giving you a subsidized loan, they cannot allocate it to someone else who needs it. Once you weigh the investment risks, I agree that it is analogous to investing rather than repaying your mortgage quickly. If you understand the risks, there's no reason why you shouldn't consider other options about what to do with the money. I am more risk averse, so I happen to prefer paying down the mortgage quickly after all other investment/savings goals have been met. Where you fit on that continuum will answer the question of whether or not it is a ""bad idea""." Turukawa's answer is quite good, and for your own specific situation, you might begin by being sceptical about what you are getting for investing a few thousand dollars.  With the exception of Paul Graham's Y-Combinator, there are very few opportunities to invest at that type of level, and Y-Combinator provides a lot of other assistance besides their modest initial investment.   I can tell from your post that you think like an investor.  It is highly unlikely that the entrepreneurial programmers that you will be backing will be wired that way.   From the modest amount that you are investing, you are unlikely to be the lead investor in this opportunity.  If you are interested in proceeding, simply stick along for the ride, examining the terms and documents that more significant investors will be demanding.  Remain positive and supportive, but simply wait to sign on the dotted line until others have done the heavy lifting. For more insights into startups themselves, see Paul Graham's essays at www.paulgraham.com.  He's the real deal, and his recent essays will provide you with current insights about software startups. Good luck. Moreover the fact that they're simply invested in two of the biggest emerging market ETFs which preform well with global stability but are overall kinda risky long term goes to show that it's not some unheard of success. As you said, the proving ground will be whether they can make money in a down economy, where it's much harder to find profitable investments. Perhaps they'll switch to bonds and commodities. The ROI percentage becomes a meaningless figure at that point and would either be infinite or a very large number if you assume an equity investment of $1 or $0.01.   At that point it's obviously a lucrative deal *as long as it works out* so the bigger question is what are the risks of it not working out and what's the ROIC. Let us consider the risks in the investment opportunities: Now, what are the returns in each of the investment: What are the alternatives to these investments, then? If it's a low margin business and you can get value for it that's higher than the leadership values it, and they have some opportunity in a better margin business but for some reason couldn't acquire debt funding or more investors to fund the new business; then it might be feasible, but unusual and probably not ideal. Could somebody explain to me exactly why the writer doesn't think this is a win for passive investing? Aren't 'this could happen' statements only relevant to active managers so if you already believe that active investing is more successful than passive then of course you'll just fit this situation to 'there is still potential for major loss, the S&amp;P has tanked x many times' because you believe that there are predictable patterns in markets while the passive investor says that isn't true. "no way -- he suggests that if you don't have an edge, no one needs to play the game. He doesn't like the idea of a ""lesser bad"" way to invest (MPT).   If you do decide to get involved in investing, then it's about absolute performance, not relative. He believes that the whole relative performance thing -- beating some arbitrary benchmark -- is just an artificial construct." "It sounds like a great opportunity, but like any opportunity you need to do your research and give it a thorough evaluation. Although the current owner may be your friend, don't let emotion get in the way of a fair and honest assessment.   Some general things you need to consider:  Past financial data of the pizza restaurant - if you are going to invest, you want your investment to pay off and to be profitable. What are the historical earnings?If you take management of the pizza restaurant are there things you can do to cut costs/increase profits?   Understand the competition that is around the area, does your pizza restaurant have a competitive edge that will enable to succeed in another location?    Do you enjoy working there? Would you enjoy working there more than the prospective work you would do as a welder?   Finally if you want to invest, what kind of investment structure? What are your rights as a shareholder? What is your ownership stake? What happens in the case of share dilution? Going back to financials, how long do you estimate conservatively that you will be able to make back the principal investment.  Now referring to your other question of ""is it worth the risk to give up guaranteed money""...  It is harder and harder for younger people like you and I to depend solely on fixed salary jobs. If you want financial success, you want to build assets for yourself that generates income without you expressly there recording your hours on a time-card.   No money is ever guaranteed. There are many risks associated with a person's whose only source of income is from his day job.   Finally, you don't necessarily have to put up the investment with your own money and give up school. You could look for other investors or take a loan on the business to open a new store. There's nothing wrong leveraging debt - it will help you save tax money.   Anyways I'm glad you've found this opportunity. Remember to always think big but be smart about it too!   P.S. If you want to pm me any specifics for me to look at in terms of financials or legal stuff I'd be more than happy to help a brother out." I think the main question is whether the 1.5% quarterly fee is so bad that it warrants losing $60,000 immediately. Suppose they pull it out now, so they have 220000 - 60000 = $160,000.  They then invest this in a low-cost index fund, earning say 6% per year on average over 10 years.  The result: Alternatively, they leave the $220,000 in but tell the manager to invest it in the same index fund now.  They earn nothing because the manager's rapacious fees eat up all the gains (4*1.5% = 6%, not perfectly accurate due to compounding but close enough since 6% is only an estimate anyway).  The result: the same $220,000 they started with. This back-of-the-envelope calculation suggests they will actually come out ahead by biting the bullet and taking the money out.  However, I would definitely not advise them to take this major step just based on this simple calculation.  Many other factors are relevant (e.g., taxes when selling the existing investment to buy the index fund, how much of their savings was this $300,000).  Also, I don't know anything about how investment works in Hong Kong, so there could be some wrinkles that modify or invalidate this simple calculation.  But it is a starting point. Based on what you say here, I'd say they should take the earliest opportunity to tell everyone they know never to work with this investment manager.  I would go so far as to say they should look at his credentials (e.g., see what kind of financial advisor certification he has, if any), look up the ethical standards of their issuers, and consider filing a complaint.  This is not because of the performance of the investments -- losing 25% of your money due to market swings is a risk you have to accept -- but because of the exorbitant fees.  Unless Hong Kong has got some crazy kind of investment management market, charging 1.5% quarterly is highway robbery; charging a 25%+ for withdrawal is pillage.  Personally, I would seriously consider withdrawing the money even if the manager's investments had outperformed the market. "You're ""onto"" something. Investing in real estate was not a bad idea about 10-15 years ago, when stocks were high, and real estate was not. On the other hand, by about 2006, BOTH stocks and real estate were high, and should have been avoided. And around 1980, both were LOW, and should have been bought. I expand this construct to include gold and oil. Around 2005, these were relatively low, and should have been bought over stocks and real estate. On the other hand, ALL FOUR are high right now, and offer comparable dangers." I would say your decision making is reasonable.  You are in the middle of Brexit and nobody knows what that means.  Civil society in the United States is very strained at the moment.  The one seeming source of stability in Europe, Germany, may end up with a very weakened government.  The only country that is probably stable is China and it has weak protections for foreign investors. Law precedes economics, even though economics often ends up dictating the law in the long run. The only thing that may come to mind is doing two things differently.  The first is mentally dropping the long-term versus short-term dichotomy and instead think in terms of the types of risks an investment is exposed to, such as currency risk, political risk, liquidity risk and so forth.  Maturity risk is just one type of risk. The second is to consider taking some types of risks that are hedged either by put contracts to limit the downside loss, or consider buying longer-dated call contracts using a small percentage of your money.  If the underlying price falls, then the call contracts will be a total loss, but if the price increases then you will receive most of the increase (minus the premium). If you are uncomfortable purchasing individual assets directly, then I would say you are probably doing everything that you reasonably can do. "It is not a ""riskless"" transaction, as you put it. Whenever you own shares in a company that is acquiring or being acquired, you should read the details behind the deal. Don't make assumptions just based on what the press has written or what the talking heads are saying. There are always conditions on a deal, and there's always the possibility (however remote) that something could happen to torpedo it. I found the details of the tender offer you're referring to. Quote: Terms of the Transaction [...] The transaction is subject to certain closing conditions, including   the valid tender of sufficient shares, which, when added to shares   owned by Men’s Wearhouse and its affiliates, constitute a majority of   the total number of common shares outstanding on a fully-diluted   basis. Any shares not tendered in the offer will be acquired in a   second step merger at the same cash price as in the tender offer. [...] Financing and Approvals [...] The transaction, which is expected to close by the third quarter of   2014, is subject to satisfaction of customary closing conditions,   including expiration or termination of the applicable waiting period   under the Hart-Scott-Rodino Antitrust Act.  Both Men’s Wearhouse and   Jos. A. Bank are working cooperatively with the Federal Trade   Commission to obtain approval of the transaction as soon as possible. [...] Essentially, there remains a small chance that one of these ""subject to..."" conditions fails and the merger is off. The chance of failure is likely perceived as small because the market price is trading close to the deal price. When the deal vs. market price gap is wider, the market would be less sure about the deal taking place. Note that when you tender your shares, you have not directly sold them when they are taken out of your account. Rather, your shares are being set aside, deposited elsewhere so you can no longer trade them, and later, should the conditions be satisfied, then you will be paid for your shares the deal price. But, should the deal fall apart, you are likely to get your shares deposited back into your account, and by that time their market value may have dropped because the price had been supported by the high likelihood of the transaction being completed. I speculated once on what I thought was a ""sure deal"": a large and popular Canadian company that was going to be taken private in a leveraged buyout by some large institutional investors with the support of major banks. Then the Global Financial Crisis happened and the banks were let off the hook by a solvency opinion. Read the details here, and here. What looked like a sure thing wasn't. The shares fell considerably when the deal fell apart, and took about four years to get back to the deal price." "Can you easily stomach the risk of higher volatility that could come with smaller stocks? How certain are you that the funds wouldn't have any asset bloat that could cause them to become large-cap funds for holding to their winners? If having your 401(k) balance get chopped in half over a year doesn't give you any pause or hesitation, then you have greater risk tolerance than a lot of people but this is one of those things where living through it could be interesting. While I wouldn't be against the advice, I would consider caution on whether or not the next 40 years will be exactly like the averages of the past or not. In response to the comments: You didn't state the funds so I how I do know you meant index funds specifically? Look at ""Fidelity Low-Priced Stock"" for a fund that has bloated up in a sense. Could this happen with small-cap funds? Possibly but this is something to note. If you are just starting to invest now, it is easy to say, ""I'll stay the course,"" and then when things get choppy you may not be as strong as you thought. This is just a warning as I'm not sure you get my meaning here. Imagine that some women may think when having a child, ""I don't need any drugs,"" and then the pain comes and an epidural is demanded because of the different between the hypothetical and the real version. While you may think, ""I'll just turn the cheek if you punch me,"" if I actually just did it out of the blue, how sure are you of not swearing at me for doing it? Really stop and think about this for a moment rather than give an answer that may or may not what you'd really do when the fecal matter hits the oscillator. Couldn't you just look at what stocks did the best in the last 10 years and just buy those companies? Think carefully about what strategy are you using and why or else you could get tossed around as more than a few things were supposed to be the ""sure thing"" that turned out to be incorrect like the Dream Team of Long-term Capital Management, the banks that were too big to fail, the Japanese taking over in the late 1980s, etc. There are more than a few times where things started looking one way and ended up quite differently though I wonder if you are aware of this performance chasing that some will do."