Margin Loan for Real Estate Investing. Is it worth it?

Question

Hi All,

I'm a newbie investor and very much looking forward to kickstarting my career in RE. Your help here will be greatly appreciated, and remembered!

I have been listening to David Greene and read a few of his books on the BRRR method. Purchasing an investment property in cash and refinancing it based on its ARV makes a lot of sense and is aligned with my long-term goals.

My situation is as follows:

1. I have a stock portfolio currently valued at $500k+, and an all-cash purchase means that I'll need to sell some shares and pay long-term capital gains tax (15%).

2. I do not have a sufficient amount in savings to complete an all-cash purchase without selling shares (I'd be looking at properties valued at roughly $100k-$150k).

I can do the following:

1. Sell $180k worth of shares (this will roughly net $150k after capital gains taxes) to put an all-cash offer on an investment property and start the BRRR route.

2. Take out a margin loan at X interest rate, maintain the current stock portfolio without selling shares, and put an all-cash offer on an investment property.

Given the factors I mentioned above and today's economy climate, would it make sense to take out a margin loan to finance my initial purchase? Is the interest in a margin loan much lower than a traditional mortgage? How would leveraging a margin loan affect refinancing of the same property?

I look forward to hearing your thoughts :)

Denver McClure · Answer

You should have ample indicators before worrying about a Margin call. Also reducing your portfolio risk before using a Margin loan is highly recommended. Low volatility ETFs (both equities and fixed income) should be selected over a 100% equities portfolio which is composed of mostly individual stocks.

If this is an account you day trade in or only hold individual stocks, then I wouldn't recommend Margin loans. Keep in mind, you wont get Margin called unless the value of your portfolio drops 50-75% (depending on the custodian), which would have to be a black swan event. Your custodian or advisor would be diligent in warning you and stopping that before it occurred.

Most people simply borrow as they need to avoid higher interest debt (paying off CCs, hard money lenders, etc) and repay the funds once they are able to. If you get stuck and can't pay off your Margin line, then just sell off a few assets (in a tax efficient manner) to cover the loan.

Consult with your CPA as well on this strategy. Just selling shares to buy RE may force your hand to pay short term cap gains, or take losses during a market cycle that is unfavorable. Just like RE, you typically want to buy and hold your market positions. If you use a Margin Loan to pay for income producing real estate, you can write off the cost of that interest as well. Like I said, chat with your CPA or Advisor first.

Denver McClure · Answer

Hey @Yair Zarmon, I'd highly recommend utilizing the Margin loan. It's a strategy I've personally used against my taxable portfolio for real estate, and one that we build for our RE investing clients.

Yes, some margin rates are cheaper than a traditional mortgage. The brokerage we use has a starting rate of 6.83% on the high end, and 6.17% on the low end. Most other brokerages have margin rates around 13% currently, so you'll want to make sure your portfolio is at the right place first. Keep in mind that margin interest is also tax-deductible if used on an income producing property.

Typically you can borrow up to 50% of your portfolio value, however you really need to ensure that the assets in that portfolio are focused on stability, not individual stocks that may be too volatile. For example, it would be better leveraged against VOO rather than TSLA, or SCHD over ARKK. You'll typically get the cash within 1-3 business days and there won't be any type of credit checks, income checks, or premium payoff requirements. Margin loans are interest only, so you'll want to design a portfolio that earns healthy dividends/interest to subsidize that cost if possible.

Mike Klarman · Answer

I mean, you are the perfect candidate to use Hard Money to scale.  You are liquid, I am guessing your credit is good.

You probably would have to put up 20%/15% of purchases to start and that will go to 90% eventually.  You could close on houses coming with 15k - 20k at the closing table.  You can do two at a time with your liquidity.  Burn and churn the SFH and when the 2 - 4 units inventory pops up you BRRRRR those.  You want more than one rent check on a mortgage.  That supersizes the cash flow.

I sent you a pm

Kavin Timtara · Answer

If your plan is to buy using Margin Loan, Rehab/Refi and pull the cash out and payoff margin loan, then it sounds ok risk to me. Also having a HELOC open is a good mitigation plan if you do get Margin called. Make sure the value can be boosted when you do Refi.

V.G Jason · Answer

What are you going to do if you have a margin call?

Sell some shares, and put 25% down on an investment property. Keep your cash as utilized as possible, leave the risk to the lender and stay the F away from getting a margin call.

Denver McClure · Answer

Interactive Brokers. You'll need a Pro account for rates at 6.83% and below.

Caroline Gerardo · Answer

@Denver McClure those rates are pretty incredible, please name the brokerage.

Fidelity charges 12.4% Schwab 12.075% Troweprice 19%  TDAmeritrade 13.5% Etrade 12.7-13.95% Ally in same range

All depend on dollar amount (broken down in groups of $10000) and can give you around 50% of the stock value on the day you apply. If the market goes poof down you can be in trouble.

Hard money loan might actually be cheaper. Some are in the 11- 13% range.

Mortgage interest is deductible differently than the interest on your margin loan, there is that going for the hard money dude. Ask your CPA this part. I don't think you can write down the interest paid on the stocks as your real estate interest, but I am not a CPA.

How skilled at this endeavor are you? Handy with a sledge hammer? Able to source materials? Know how to secure the site?  A property valued in the $100000 is going to be in what type neighborhood and can you live there to complete this project?

Margin Loan for Real Estate Investing. Is it worth it?

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