Pledging Brokerage Account vs. Using Cash for Downpayment

[Isaac Hayes]

I am planning on buying a 4-plex in Colombus, Ohio in December. I currently have funds for a 25% downpayment in a brokerage account invested in low cost index funds. My initial thought was to liquidate the brokerage account for the downpayment. However, I will have a somewhat substantial tax bill upon liquidation, which I would like to avoid.

One option to avoid the tax bill is to “pledge” the brokerage account to the lien holder, which will keep the money invested in the brokerage account in lieu of a cash downpayment. This would also allow me to “double dip” the growth of the brokerage account since it has exposure to the current index funds and the 4-plex. However, I will not be able to control this brokerage account until I have another 25% of equity in the house. My understanding is that, If my equity in the house decreases (by the value of the “pledged” brokerage account decreasing), the lien holder can request additional funds from me to true up my equity to 25%. I plan on having cash reserves for this property. However, my fear is that the brokerage account goes to zero in a market crash, and I do not have another full down payment ready to deploy.

Has anybody gone through the process of pledging an account rather than using cash for a downpayment? Would you recommend pledging an account vs. using cash for a downpayment to somebody in a strong financial position with a high paying W-2 job? Why or why not?