SBLOC, All Cash Purchase, Refi, Payback, Repeat. Is this a thing?

[Seo Hui Han]

I must have too much time on my hands. Was having a fun, purely academic conversation with someone and somehow the topic went from the stock market, ETF's, to real estate, to BRRR's and either he or I or both us came up with this and wondered is this a legit strategy that others have used?

Here's how it works:

For starters, we are assuming that you have a sizeable stock portfolio.  For argument's sake, and to keep the math simple, let's say you have $1 Million in ETF's or some other safe-ish, well-diversified assets.

Step 1: Take out an SBLOC (Security backed line of credit) on said portfolio. Could be a different product too (Pledge Asset, for example), but basically a loan against your holdings. Let's say you want to stay conservative and only take 50% LTV, or $500,000.00, so that you don't have to sell anything in case of a market correction and there's a margin call.

Step 2:  Purchase a rental property, all-cash, with that $500,000.  Or maybe 450K, because you may need reserves, have to do some reno, etc.  Stabilize and lease up the property.  At this time, you would also be making interest only payments on your SBLOC.  Also at this time, your stock portfolio would continue to increase in value as well.

Step 3: Refinance your rental property. If you're lucky, then after a couple years your property has appreciated, gone up in value (possibly because of rehabs you've done, rents that have been raised, or both). If you get 70% LTV, you would be getting a sizeable chunk of that original $500K back. Or maybe all. Depends on market conditions, interest rates, etc.

Step 4:  Pay back the principal you originally took out on your SBLOC, bringing your leverage balance on your portfolio back to 0.

Step 5:  Repeat.

Opinions?  Is this playing with fire?  Is this so crazy that it might just work?  I imagine if stocks and RE took massive corrections, this might be a recipe for disaster?