Securities-based Financing Options for Real Estate Investors

[NA Nicholas]

Any lending program involving the transfer of title/ownership of your securities to any third party as a condition for funding, is by definition exceptionally risky and according to IRS rulings in 2010 and subsequent litigation against "nonrecourse stock loan" providers, a full sale subject to capital gains taxes at the moment the securities' title transfers to the lending organization.

Only two types of securities finance are legit for real estate purposes, and all are licensed SIPC/FINRA: 1) A margin loan, which caps at 50% LTV and averages about 6% interest, based on a single stock; and 2) a line of credit, based on the average value of a basket of stocks, with LTVs typically up to 98%.

Margin loans by definition are risky, however. The fact that they are based on a single stock means the entire loan is beholden to that single stock; should that stock fall dramatically, it will be called and the loan will need to be immediately repaid or the stocks will be sold to fulfill the loan obligation. The FRB classifieds margin loans as "purpose credit" intended to leverage other securities, not for other purposes (although other purposes are possible, of course).

A line of credit, however, averages all of the eligible securities in the portfolio and allows LTVs that are far higher. The funds are intended for any purpose other than the repurchase of marginable securities. It can be tailored to specific needs like any normal loan, and typically comes with more tolerant call policies and more personalized service. These - as long as they are provided via SIPC/FINRA licensed institutions and advisers - can be a good means to finance investment real estate. (The leading firm for this type of loan in the U. S. market presently is A. B. Nicholas - https://abnicholas.com/leverageline)

Knowing the risks and benefits of securities-based financing can be the difference between a great real estate investment division and a very bad one. Choose wisely.