Need some creative ideas in order to continue progressing. Securities Based Loan?

Question

Hey, BP community,

So I have hit a bit of a stalemate with my investing career. I missed out on one great opportunity because I didn't have the lending set up. The lending wasn't set up because to apply for a conventional, I need a paycheck. I am currently off rotation until the middle of March therefore do not receive a paycheck. I have just met someone who told me about the possibility of taking out a securities-based loan. We have about $100k wrapped up in the stock market and we could potentially get 60-70% of that from my understanding. Not enough to buy a house down here in the St. Augustine area.

We have other rentals in MI that are cash-flowing well and have built up some equity. Maybe $200k between the three of them. My question is how would I be able to leverage my debt to a point where it would make the most sense to pick up another rental property or invest in another business?

My risk tolerance is a bit higher while I still contract overseas. Likely for the next 6 months. After that, my goal would be a steady stream of income while I take a few months to re-assess and figure out the next step in my career.

I would love some input from the community. Or anyone in the St. Augustine area who is interested in picking up some real estate or starting a business. Any like-minded individuals would be more than welcome. I want to continue to progress and I want to take everyone with me.

Thanks for your time,

Brandon Gall

Owner/Operator

Gall Investments LLC

Mason Liu · Answer

Hey Brandon,

Fellow investor in St Augustine! So with a SBL, typically you are able to take about 50-90% of your marginable securities. If your portfolio is allocated more towards equity, you probably will be able to take out closer to the 50% amount of your portfolio value, which would be $50k~. Agreed, $50k~ does not go very far as a 20% downpayment in St Augustine lately, and although you mentioned you have a higher risk tolerance, that would be a lot of debt you would be undertaking between margin, your existing rental property debts, and the new debt with the planned purchase. If anything goes wrong with the new property, or if the market takes a dip, your margin loan and the new property could be at risk. Due to the amount of liquidity you have, it's hard to recommend the SBL loan (or any additional leverage) without knowing your full financial picture since it does seem very risky.

Now if you truly do have a home run deal in the works and it would cash flow and work with DSCR rates and terms (which I believe are only a couple points above most margin rates or conventional loan rates now), I would say that might be an option to consider. That way you reserve some cash for yourself in case additional repairs are needed etc.

Chris Seveney · Answer

Securities based loans are a lot harder to get. You are better off with a DSCR loan and paying a little higher rate, plus a lot less risk than using all of your net worth as collateral.

I would absolutely pay an extra 1% on a loan with no personal guarantee than put all of my net worth at risk.

Scott Jensen · Answer

Its hard to get a securities based line of credit with a $100k portfolio. The smallest one I have set up was around $200k on a portfolio around $500k.  Really, where I seem to use these most is with a client that has several million in stock market investments and wants access to funds without selling the stocks and paying the capital gains taxes.

I probably wouldn't advise this...but you could look around for a custodian that has really cheap margin rates...and open an account there...and then take margin out of the account...That's what I do personally.  You could really screw yourself over with a margin call though, so proceed with LOTS of caution.

Logan Laperriere · Answer

HI Brandon,

Have you tried looking into a DSCR (Debt Service Coverage Ratio) loan? That would go based on the income of the property and your down payment/cash reserves rather than your current income. It may be a good solution for you.

Brandon Gall · Answer

Mason! Thanks for all the information man. I think the high-risk tolerance is only going to last another 6 months or so. I'm trying to secure one more property before I go back to school and therefore back down to a single income with my wife while I finish flight school. My income now would essentially allow me to be able to pick up a nicer property, but once we're back down to a single income it'll be harder to get approved for almost anything..

I will continue to look at DSCR or try again while I'm at work for a conventional loan.

Brandon Gall · Answer

Thanks, Scott, I'll keep pushing for the conventional. Only a couple more weeks and I'll have a paycheck for a little while again..

Seems like the trend is to stay away for the SBL for a while.

John Karg · Answer

Hi Brandon,

If you're willing to liquidate the stock investments to use for a down payment, you could get around the income requirement by using a DSCR loan. Let me know if you have any questions!

John

Raymond J. Rodrigues · Answer

@Brandon Gall, it sounds like you work a seasonal job and still may qualify for a conventional loan. I just helped a travel nurse that was denied by five other lenders due to the seasonality of their job and lenders concern with occupancy fraud. I would recommend reaching out to other lenders that have a better understanding of your line of work.

Brandon Gall · Answer

Thanks, Chris Seveney. You're right it is a bigger risk, but we would still have a sailboat we could get a decent amount for if we had to sell as well as three other properties, but the question would be how liquid are the assets truly? And would we want to put ourselves in that position for a worst-case scenario? Likely no. We could but it would suck haha.

Brandon Gall · Answer

I have, but from my understanding, a securities-based loan would have a more competitive interest rate. The last financial advisor told me securities based loans are close to a conventional loan's rate. Unsure on if i need income to apply for that loan though. Still exploring this option.

Need some creative ideas in order to continue progressing. Securities Based Loan?

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