Securities Backed Line of Credit? For BRRRR Strategy?

[Mark B.]

I haven't seen much if any discussion of this type of funding anywhere on the site or forums so I wondered if anyone had experience. It seems like it could be a good method to fund BRRRR properties in lieu of hard money, a HELOC, or other options of that nature.

For those that don't know, a securities backed line of credit is a LOC that is made available to borrowers that have significant funds in their retirement/brokerage accounts. Firms such as Morgan Stanley and Edward Jones call these different things, sometimes Liquidity Access Line, etc. But they're all essentially similar vehicles. The idea is, for round numbers sake, if you have one million dollars in total invested funds in your 401K, IRA, etc. accounts the firm would offer you a line of credit up to a percentage of your held assets. LTV ratio varies, sometimes they'd give you as little as 30%, other times as high as 95%, from my research it seems that you'd get somewhere in the region of 65% max credit line. So one million of assets in a Morgan Stanley account would theoretically qualify you for $650K as a line of credit. The interest rates are pretty low, fairly close to prime and they go down lower the more assets you have and the higher the line of credit is. Since it's essentially very much a secured asset that the line is based on. The payment plans seem very generous too. You can use it as if it were a credit card, and pay variable interest and they offer interest only payments. Or you can take a set amount for X number of years. The main danger of this type of lending is that if the stock market crashes and your LTV drops significantly as a result (i.e. you have a $650K LOC based on $1M in assets, the stock market drops 50%, your line of credit eligibility drops in half to $325K, so if you have loans out for most of your LOC they could call them due immediately or require you to add significant cash to your account to cover the margin of difference. I don't understand the ins and outs entirely hence my posting here, but that is the long and short of it. It could be a great deal, and it could be very risky given a market drop and irresponsible borrowing/over-leveraging.

All that said, does anyone here employ this technique for acquiring properties, specifically BRRRR properties? I'm currently buying properties out of state and having them managed so it would be challenging to attempt the BRRRR strategy currently (especially the first time) without having significant boots on the ground. But as I continue to build my portfolio and continue to increase the funds in my retirement vehicles I'm wondering if this would be a good way to employ BRRRR once I move to the area where I'm investing as I intend to do in the next couple of years.

My thinking is that theoretically when I'm ready to start on some projects, based on my holdings, I would be able to get an SBLOC for ~$250K which I would only use a small percentage of. For instance, doing two projects at the same time. For the sake of simplicity in a hypothetical scenario we'll say $40K purchase x 2, $30K rehab x 2, ARV of $120K x 2. So total money accessed from the LOC would be $140K which would seem a low enough utilization to avoid anything except a doomsday Wall Street scenario where the stock market drops 50% overnight. And since the vehicle I'd use would be interest only, I'd be only paying the 4-5% interest for the holding/seasoning period before hopefully re-fi'ing out to pull the capital out to repay the LOC. Rinse and repeat. Obviously the benefit to this would be that the interest is significantly lower than using hard money, plus you act as your own underwriter more or less which simplifies and speeds up the process. And getting these lines of credit seems to be fairly simple and you can have access to the funds in 24-48 hours, and don't have to apply/re-apply each time, and it acts like any other revolving line of credit in that you can reuse it over and over so long as you're able to manage it efficiently. So in my hypothetical perfect world scenario, the numbers would look like this for two SFH BRRRR projects happening simultaneously:

Cash Purchases: $80K

Rehab: $60K

ARV: $240K

Refinance 70/30 LTV: Pull out $168K, repay $140K SBLOC, $28K extra left over

or Refinance 60/40 LTV: Pull out $144K, repay $140K SBLOC, $4K extra left over

Obviously the numbers will vary wildly with holding costs, closing costs, etc.  But this is for illustrative purposes only.  Holding costs in this scenario wouldn't hurt so bad if six months seasoning is required since the interest is low and that's all you'd need to be paying monthly, in theory.

All that said, does anybody do this currently? If so, what has your experience been like? Am I off base on any of the information I've gleaned? Obviously there are lots of ways to fund BRRRR purchases, I'm not saying this seems like the best, but it seems to be one that could align very well with my finances. Again, the above scenario represents a "nothing hits the fan" situation which rarely ever happens so I'm well aware that the realities will be very different. But I'm mostly curious about the workflow of doing such a deal and if there's any major differences to using a HML or a HELOC funding for these types of deals. Any replies would be much appreciated. Thanks in advance!