Buying rental property with money borrowed against stocks

[Sherrie P.]

Has anyone ever borrowed money through a bank using your stocks and bonds as collateral?

We could sell the stocks and pay cash for the property, but we would have to pay at least 15% cap. gains.

We would get the benefit of deducting mortgage interest on the rental.

Also, if we did not pull the money by selling our stocks and bonds, they still have a chance to grow.

What is the down side?

[David Ackerman]

Yes, you can get a Portfolio Line of Credit. Here is how it works at Wells Fargo:

1)It has to be an account that is part of Wells Fargo Advisors. That means you have an investment specialist who manages your account. Me personally, I have 2 accounts under the Wells Fargo Advisors tree. 1 account is for a small amount and my specialist gets 1-1.5% in fees each year for managing that account. The other account, is where 90% of my stock portfolio is. There is no yearly fee because I manage it myself. But, each trade costs $30 (I am very inactive and hold for the very long term so these fees don't cost very much.)

2)Stocks under $10 don't count

3)The interest is Prime (so, right now that money costs me 3.25%)

4)They give you a line of credit for 50% of your eligible portfolio. So, if you have $1 million in an eligible portfolio, then they give a line of credit for $500,000. Now, if u max out the line of credit, and your portfolio drops to $800,000, then u are forced to infuse capital or payday down the line of credit to keep the proper spread between the borrowed money and the value of the portfolio.

So, what I personally do, is I use the line of credit to do short term Hard Money Loans (typically 1 year loans). The HML's pay me around 14-16%. The interest costs me 3.25% on the Portfolio Line of Credit. I keep the spread.

Its a great use of capital if you can keep these things in mind:

1)Always have some extra cash around in case the portfolio drops 30-40%

2)Recognize that they key to this game is low interest rates. If Prime rate goes back to a more normal level of 6-7% then this game is much less practical because the spread is much less.

3)If you are gonna do HML's, make sure you get proper appraisals done and make sure you can really trust the people you lend too.

4)Make sure you have a solid portfolio. If you are only invested in the hottest stocks right now like TSLA, TWTR, and FB then your portfolio will fluctuate wildly. If you have a solidly diversified portfolio with a small amount of high flying stocks, and mostly safe, long-term dividend stocks like a XOM, VZ, KO, BRK-B, SBUX then you are much better off.