If someone can find the right investment and is willing to take some risk, John’s method WILL work. However, it is definitely a bit risky of a manoeveur. The stock market is fairly volatile, and an index fund reflects the volatility as well as the good times. I applied the thinking of someone who wants to only buy fairly SAFE investments to test this method of investment, to see if it would work for them. If you’re into safety, you won’t make a dime. You’ll lose money unfortunately.

The sweet spot is to have the rate of return, equal the rate of borrowing, after taxes. Then compound interest can really do its magic. So if our example person really got an effective, after tax 4%, he’d be OK, but he wouldn’t beat inflation on the investment which is currenlty 3% and rising.

Most people would forget about the tax rate and think that because the interest can be written off against the investment, you’re good to go. However you’re getting taxed upwards of 30 – 40% on your capital gain, and your interest write off against it is only 6% of the principal’s interest. Your investment has to have a higher effective, after tax rate to make the big gains, and if you’re making a rate less than borrowing, it just isn’t going to happen for you in the long run. It’s like those people that think AMWAY works when they write off all the product they buy towards their non existent income. You’re only fooling yourself.

Bottom line, in order for the method to work, the effective rate of return must be at least equal or greater than the rate of borrowing. For many who can only fathom the most pedestrian of investments, it won’t work for you.

Oh, and you need to be in Canada because in the US, you can’t write off the interest used to invest, but the funny thing is that you can write off improvements to your home, which you can’t do here.