Using Margin Loans To Refi Mortgages for Investment Real Estate?

[Arthur Johnson]

I have been thinking a lot about using margin loans to refi some loans in my buy & hold investment real estate portfolio (not using it as a bridge loan, but permanent financing). I know…I know it sounds like a bad idea on the surface, but as I dug into it more the idea seems to have some merit.

First of all, Interactive Brokers (a legit public company) has AMAZINGLY low margin rates. It is 1.59% for $100k or less and 1.09% for $100k to $1M. The rate is based on the Fed Funds rate + 150 basis points (or 1.5%) for loans under $100k or + 109 basis points for loans between $100k and $1M.

My sense is the Fed Funds rate will stay low for a while. Looking at this chart the Fed Funds rate has been around 2% or less since 2007. The financial crisis set off what I believe will be a fairly long low interest rate environment. I don’t have a crystal ball, but we may be in a situation where it will be difficult for the Fed Funds rate to get to more than 5% anytime soon.

So if I can get a loan at this rate, it seems very attractive. But here are some of the cons. Finance 101 says you should never fund a long term asset with a short term financing vehicle. Rates could change. Interactive Brokers may raise their rates. A whole lot can change because this rate is variable. My counter to this is if I can get a cheaper rate, but still apply the same payment, I can pay off my loans a lot sooner (probably 10 yrs vs 30 years) and escape before rates go up too far.

Another con is if my securities drop in value, I will get a margin call. My counter to that is most of these securities are blue chip stocks and one is a S&P 500 ETF. So they are some what stable. Also, I will only borrow 10% of the securities value so they would have to drop 90% for a margin call to happen.

Here is my portfolio.

I was thinking about first paying off the 4.17% loans in my portfolio. This is a line of credit that I can pay down (or pay off completely) and always keep it in case the margin loans rates spike above the 4.17%. I feel comfortable starting here because this line of credit is up for renewal in Nov '24 anyway so I don’t think I’m taking a tremendous amt of interest rate risk by doing this move.

Then the big question is do I take the short-term margin loans and pay off either the 20-year loans or 30-year loans. Those rates are 5% and 5.5% respectively. This is where it becomes a more difficult decision. Having a locked-in interest rate for 20 or 30 yrs is safe, but damn 1.59% is hard to pass up!!!

I would love to hear this group’s opinions on this. I’m sure I have not thought about all the angles on this. Thank you.