Secured stock loans to buy rentals...

[Hao Kung]

So I know secured loans are not a new concept. And from previous threads on here, they seem to be fairly unpopular.

But at least for my situation, they seem like reasonable ways to finance rentals without having to liquidate stocks.

Here's a summary of my situation and my thinking, I'd appreciate comments on where my flaws in the analysis are:

- 8 conventionally financed properties, so I can only buy 2 more using conventional mortgages.
- 12 mo expense reserves in liquid accounts (both for proof of funds and downpayments for new purchases)
- Rest of my assets are in stocks/investment accounts.

Idea: Since it looks like secured loans can be had for fixed prime rates (~3.25% currently) and various stocks/bonds are currently yielding similar if not higher dividends in my portfolio. I can put this money to work twice by taking secured stock loans out against high dividend stocks.

Concrete example: lets use BND (A total bond ETF, currently yielding: 3.31%)

EV analysis:
No secured loan: Stock Dividend + Appreciation

Secured loan: Stock Dividend + Appreciation - Fixed Loan Interest + Rental cash flow

So lets say I borrow money @ 3.25% to buy a rental house that yields 8%. The dividends off from BND pay for the fixed loans, so assuming no market value change in the price of the security, this is roughly equivalent to selling stocks and buying in cash.

But lets look at the other interesting cases:
1. You use a stock that yields higher than the fixed loan rate. You now are free rolling on the rental and stock appreciation.
2. The stock used as collateral goes up in value, now you net the appreciation + dividend differential + rental cash flow.
3. The collateral stock drops a bit, but not enough to justify default, this scenario is no different than normal investing losses, and I also have an 8% rental which only helps.
4. The stock used as collateral drops a ton, it sounds like you can default with no hit to your credit or anything, the bank keeps your stock, and you keep your house. This scenario is no different than just selling your stocks immediately and buying the property free and clear except you paid interest for some time as well (but dividends offset this to a large degree).

Conclusion:
So long as Rental return > fixed interest rate for the secured loan, this is a clear win + gives you extra capital to keep in the stock market.

This seems great to me, it makes sense to me that banks would want to make these loans, as they are getting tangible assets that they can easily sell/recover. And they are still making prime by lending you effectively your own money.

What am I missing here? This seems almost too good to be true given that I already have stocks and rentals. This would just let me have more of both without increasing my risk?

That just doesn't seem possible.

Thanks,
-Hao