Cash-Secured Loan Strategy

[Ben Parr]

I've been talking to a bank lately about refinancing some of my properties. One strategy I have thought of goes like this:

Partner pledges $130k in securities (instead of 100k cash) to secure a $100k loan. This would allow the cash partner to essentially keep all of their capital and continue growing it (though they would give up the ability to liquidate it or otherwise use it during the term of the loan). Since it is a secured loan the terms are pretty good 3-4% if I recall, but are not fixed-rate long term loans so there is risk in rising rates and having a baloon. Also if the account value goes below 100k they would have to put more money up. Doing it this way at a larger scale would also let us re-fi many properties at a good rate, and pull our cash out of them to redeploy into new buy and holds.

What am I missing? I haven't heard much about this strategy so I'm either missing something big or so few investors have the resources for this that it just doesn't get discussed.

[Dion DePaoli]

It is not uncommon for higher net worth investors to pledge alternate collateral for a loan. Depending on what is being pledged the risk for the bank may be a little less than that of a mortgaged property based on the liquidity and value of the collateral. I have seen these types of deals as pledges of existing securities and where the bank sells a security to be held, like a CD, during the term of the loan. Aside from the particular details you seem to have a decent handle on the structure it is fairly straight forward. The barrier will be the value of the collateral and it's stability in terms of value as you mention along with the ownership structure of the collateral.