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?

[Stetson Oates]

There's a lot to unpack there I think.  This is a viable strategy as I almost did this my self.  I ended up going a different route but this is as good of strategy as any depending on the terms on the SBLOC. Betting on appreciation for the recapture of initial funds in this market with a refi may put you negative cash flow. I would keep that in mind.

[Seo Hui Han]

@Stetson Oates, Thanks, and you are right, market conditions would limit how much of the initial funds one would be able to withdraw.

I should also add that, while I am not an accountant or tax professional, it appears that at no time in the strategy above would one trigger a taxable event, since you're not selling any stocks or property.  There would be the cashflow from the rental property, of course, but that would be largely mitigated by depreciating the property.

[Nicholas L.]

@Seo Hui Han

that's just the BRRRR strategy, and using borrowed money for the buy.

it's just about risk.

low risk: buying with actual cash, from your own checking account.  no financing costs whatsoever.  but that money is tied up.

higher risk: borrowed money. any kind of borrowed money. hard money, private money, HELOC, 401K loan, SBLOC, your uncle's money.

[Seo Hui Han]

Quote from @Nicholas L.:

@Seo Hui Han

that's just the BRRRR strategy, and using borrowed money for the buy.

it's just about risk.

low risk: buying with actual cash, from your own checking account.  no financing costs whatsoever.  but that money is tied up.

higher risk: borrowed money. any kind of borrowed money. hard money, private money, HELOC, 401K loan, SBLOC, your uncle's money.

 You're right.  In fact, I'm embarrassed to say that not only is this not anything new, but there's also a YouTube video about this:

[Nicholas L.]

@Seo Hui Han

All good.  Are you investing in RE?  I'm actually trying to get more into stocks while continuing to grow my RE portfolio.

[Seo Hui Han]

Yes, I am all into RE.  But I am also into stocks, and this seems like the best of both worlds.

Also realized I messed up with the YouTube video.

https://www.youtube.com/watch?v=3ZnjNdW3Yck&t=58s

[Ivan Terrero]

@Seo Hui Han

There was a guest on BP money who did this......don't remember the episode...

[V.G Jason]

This would be a precarious time to do a loan from stocks. 

[Chris Martin]

At the end of the day, you are pledging an asset (stocks, in your example) for potential liquidity. Disclaimer: my stock 'portfolio' is small relative to NW. 

After the GR (Great Recession) we did these types of loans through a pool (group of properties in a tranche) on lower-cost, lower-rent property. See this BP post, for example.  Simple collateral substitution. 

Would I be doing business today like on 12/21/2012? #e!! no. There is a time and place for every strategy. When factoring in risk, I agree with @V.G Jason

[V.G Jason]

Quote from @Chris Martin:

At the end of the day, you are pledging an asset (stocks, in your example) for potential liquidity. Disclaimer: my stock 'portfolio' is small relative to NW. 

After the GR (Great Recession) we did these types of loans through a pool (group of properties in a tranche) on lower-cost, lower-rent property. See this BP post, for example.  Simple collateral substitution. 

Would I be doing business today like on 12/21/2012? #e!! no. There is a time and place for every strategy. When factoring in risk, I agree with @V.G Jason

 The start of the fall....margin call. Get ready. 

[Chris Martin]

Quote from @V.G Jason:

Quote from @Chris Martin:

At the end of the day, you are pledging an asset (stocks, in your example) for potential liquidity. Disclaimer: my stock 'portfolio' is small relative to NW. 

After the GR (Great Recession) we did these types of loans through a pool (group of properties in a tranche) on lower-cost, lower-rent property. See this BP post, for example.  Simple collateral substitution. 

Would I be doing business today like on 12/21/2012? #e!! no. There is a time and place for every strategy. When factoring in risk, I agree with @V.G Jason

 The start of the fall....margin call. Get ready. 

Scary stuff. Over $800 Billion sounds like a big number. $2,400 per person in the US. Chart is from FINRA data on their Margin Statistics page. 

(Chart goes right to left chronologically.)